Skip to content

China’s Economic and Social Conflicts Nearing a Crisis

[Editor’s Note: Caijing Magazine recently interviewed Professor Wu Jinglian, a senior research fellow at the Development Research Centre of the State Council of the People’s Republic of China. During the interview, he stated that China’s economic and social conflicts have reached a critical point and that China must press forward with further reform to establish and improve a market economy that is based on competition. He also criticized China because it has, in recent years, strengthened the government’s and the state-owned enterprises’ (SOEs) "control power." The following are excerpts from the interview.] [1]

Caijing: In the past 30 years, two major changes have become apparent in China. On the positive side, China has enjoyed sustained and rapid economic growth. China’s gross domestic product (GDP) in 2010 ranked second in the world, surpassing Japan. At the same time, per capita disposable income greatly improved and hundreds of millions of people have been lifted out of extreme poverty. On the other hand, China has paid a very hefty price for this rapid economic development. However, as a big country with a population of 1.3 billion, only looking at the GDP growth is not enough. Serious problems include a recent acute shortage of resources, worsening environmental destruction, corruption throughout society, and a widening disparity between rich and poor that now threatens social stability.

Wu Jinglian: I have said on numerous occasions that, at the end of the last century, under this dual system of semi-controlled yet semi-market economy, the question for China was: “Where are we going?” We faced two possible futures: one was to follow the reform path to perfect a market economy, limit administrative authority, and head toward a market economy under the rule of law. The other one was to follow the path of State capitalism, which strengthens the government’s role and which would lead to the dead end of crony capitalism. China’s economic development has been a race between these two paths.

In fact, many of the evils that exist in today’s society fundamentally resulted from the economic reform not being fully implemented in place, political reform seriously lagging behind, and administration authorities intensifying repression and intervening in the legitimate private sector’s economic activities. People’s unhappiness with these evils can be used as an important driving force to promote reform, clean up deception, and wipe out corruption.

However, in the current system where public opinion is misled and rational discussions are suppressed, the guardians of the old (pre-reform) system are trying to blind and confuse the public by blaming the reform for the increasingly rampant corruption and the increased injustice to underdeveloped and disadvantaged groups. In doing so, those who favor the old system are shifting public attention away from the rich, special interest groups toward market oriented reform, with the goal of leading the masses astray.

Caijing: All the crony capitalism in Chinese society rests on the fact that unrestrained power has intervened in economic activities and controlled economic resources. Supporters of the old system are demanding the strengthening of the government, of the officials’ “dictatorship,” and of SOEs’ monopoly positions so as to curb corruption and narrow the gap between rich and poor. This approach can only be counterproductive.

These supporters of the old system join the public in denouncing the evils of corruption,
but they have found the wrong root cause and have prescribed the wrong solution. Yet by inciting people with populism and nationalism, their views have had some market.

Wu Jinglian: This is what we should be most concerned about. By allowing populism and nationalism to develop, Chinese society is likely to move towards an extreme, where the process of modernization will be interrupted and enter a new state of chaos. This is clear from the nearly 100 years of transformation of the social history of humanity in the 20th century: as the sage Gu Zhun [2] put it, no matter how sincere the concept is, if we follow the path from 1789 (the French Revolution) to 1871 (the Paris Commune) and to 1917 (the October Revolution), we will not get the promise of heaven on earth, only a big disaster and retrogression.

When the People’s Republic was established in 1949, many of us believed that the problem was completely resolved and the “cycle” of history would not repeat itself. Contrary to our wishes, 18 years after the revolutionary victory of 1949, China was embroiled in the civil strife of the “Cultural Revolution.” Using Gu Zhun’s words, “In the name of the martyrs, [the Chinese Communist Party (CCP)] has transformed its revolutionary idealism into a conservative reactionary autocracy.”

Why did the radical revolutionary road fail to bring social welfare and progress to the Chinese society, but instead transform [the country] into a Jacobin style or Stalinist autocracy? Gu Zhun’s answer: the leaders of this trend, who set the ultimate goal of building heaven on earth, believed that they themselves were the embodiment of “the people” or “the general will” and thus had full legitimacy to use all means possible, including dictatorship and terrorist killings to achieve this goal.

Caijing: Some people think that it is the fate of Chinese history that China will always have either a tyrant or a mob and that it cannot avoid it but has to choose to go along with one or the other. This pessimistic view is quite popular because the current reform is at a standstill.

Wu Jinglian: I do not think that this conclusion can be substantiated. It is because the cycle of Chinese history is a product of the traditional social structure. Changes in the structure of the modern economy and society have made it possible for the middle class to lead social development. The new middle class is becoming a key player in the pursuit of freedom, equality, and social harmony. Presently, a new middle class, consisting mainly of professionals, has been growing rapidly in China. In time, along with the development and growth of the new middle class, it is completely possible that we will escape the cycle of Chinese history and succeed in building a modern China.

Caijing: What is worrying is that, as different ideas collide and are confronted, rational thinking and discussion are often attacked and subjected to defamation and rumors. As people are used to using violent language to win an argument, it is common for people to go extremes when expressing different ideas [to win others over].

Wu Jinglian: As Poland’s reformist economist Kornai said, “Free and practical discussion is a prerequisite for the success of reform.” If different social thoughts could now be fully debated on a platform of reason, it would help China to implement a smooth social transition.

Why, when people have different pursuits, do they go to extremes? Fundamentally, it is because of the many social problems that have accumulated in China’s society. The miracle of China’s rapid growth over the past 30 years came about because the new market economy liberated people’s entrepreneurship. In the past few years, however, with the government and SOEs strengthening their “control power,” China’s economic and social conflicts are nearing a crisis. If we cannot use sound and orderly reform to actively eliminate the root cause of these conflicts, extreme solutions will become more and more popular.

Therefore, the way for China to overcome its social ills and to avoid the tragedy of repeating history is to establish and improve the market economic system. That is to say, [we must] do away with the interference from special interests; promote market-oriented economic reform and political reform characterized by the rule of law and democratization; eradicate the basis for crony capitalism; and place the exercise of public power under the constraints of constitutional law and public supervision. There is simply no other way. In recent years, China’s reform has been at a standstill. It is therefore imperative to re-initiate the reform agenda and to earnestly promote economic reform and political reform.

Establishing and Improving the Competitive Market System

Caijing: If we restart the reform agenda of marketization, the rule of law, and democratization and set up the direction for reform as a “top-level” strategy, then we need to discuss the specifics of the elements of reform.

Wu Jinglian: With respect to the economic system, the core issue in furthering the reform is still to establish and improve the competitive market system so that the market can fully play its role in allocating resources.

Two main features of China’s economic system threaten the competitive market: first, the state-owned economy has a monopoly on some important industries; second, the government’s intervention in the market is excessive. Reform should start with these two features.

Caijing: The monopoly of the state-owned economy is an expression of two characteristics. The economic monopoly means that SOEs rely on the government’s preferential policies to support their huge economic strength so they can suppress competitors. The administrative monopoly means that the government protects the interests of affiliated SOEs (including some local non-state-owned enterprises) using its administrative powers, in order to exclude competitors or restrict competition.

Wu Jinglian: For the first type of monopoly, the strategy to establish a fundamental cure is to continue the adjustments of the State-owned economy. At present, all levels of the government and SOEs control too large a share of the country’s economic resources, particularly land and capital resources. They then invest the majority of those resources into profitable enterprises that are in competition with privately owned businesses. This is not the way it should be done. [We] should adhere to the principles of the 1997 15th National Congress of the CCP, which require the state-owned economy to exit gradually from the general competitive sectors.

Caijing: In view of past experiences in the transitions in Russia and other countries and some parts of China, many people worry that, if large-scale SOE restructuring takes place in China, China will suffer a huge loss of State assets.

Wu Jinglian: This fear is not without basis. However, the SOE restructuring is not always the same across countries. Some countries and regions may have a relatively complete legal system, powerful social supervision, or appropriate implementation, and thus their State-owned economic reform has been more effective. To passively avoid the reform does not eliminate the danger that the bigwigs will otherwise appropriate and devour public property.

Therefore, [we] should require and urge the government to act responsibly to prevent certain people from abusing their power to gobble up public property during the reform of the State-owned economy.

Caijing: Since the original state-owned economy is very large, a considerable amount of State capital will remain in the profit making sectors for a long period of time.

Wu Jinglian: Most of the SOEs should reform, becoming companies that issue stock, with the exception of very few enterprises in special industries that should remain State monopolies. As businesses, they should strive to become bigger and stronger. They should also compete on an equal footing with their economic peers, and should not enjoy any special powers; nor should the government grant them any preferential treatment.

As for the ruling party, the development of diverse forms of ownership provides it a reliable foundation for governing the country. It should be more careful not to categorize or discriminate against businesses based on the form of ownership; – it should treat them equally.

Caijing: The elimination you mentioned earlier of the administrative monopoly in the Chinese market is also an extremely important issue. Unlike the market economy that sprang up naturally, China’s current system evolved from a planned economy and still retains many of the elements of the “national syndicat.” Some SOEs and those non-state-owned enterprises under special care of the government enjoy a government-granted monopoly power. They exclude and restrict competition and cause severe damage to the market. Just as some scholars have said, “The administrative monopoly in China’s economy has become a public hazard.” Many scholars in the legal and economic communities have conducted in-depth research as to why the administrative monopoly in China’s economy and the Anti-monopoly Law are so ineffective. They have put forward positive proposals to stop the administration of monopolies. The authorities, however, have not paid much attention to their proposals.

Wu Jinglian: Improve anti-monopoly legislation and strengthening anti-monopoly law enforcement is a pressing issue that must be addressed in order to improve the market system in China.

As we all know, competent authorities usually use the Party and government regulations or instructions to establish the administrative authorities’ and organizations’ (including companies’) monopolies. Expecting these authorities to order their enterprises to “correct” unlawful behavior which is, in and of itself, the result of its own regulations or instructions is totally unrealistic. Therefore, there is nothing strange about China being overrun with administrative monopolies.

Caijing: Because of this, many scholars believe that monitoring the government and preventing the government from abusing its administrative power to restrict or damage market competition should be a main part of China’s “Anti-Monopoly Law.”

Wu Jinglian: To prevent monopolies from damaging the normal operation of the socialist market economy, in addition to firmly carrying out the overall adjustment of State capital and the reform of SOEs, we must also unswervingly carry out anti-monopoly judicial reform: First, we must amend the anti-monopoly law or separately pass an Anti-administrative Monopoly Law specifically applicable to the Party and the government organs that are the cause of such an administrative monopoly. Second, we must set up anti-monopoly law enforcement agencies that are above the Party and government organs. They must not only be responsible for dealing with cases of economic monopoly, but should also be responsible for handling administrative monopoly cases. Third, because an administrative monopoly is related to government misconduct, we should revise the administrative law and grant the court the power to monitor government actions and to correct improper administrative actions.

[1] Caijing Magazine, September 2, 2012 [full text can be viewed at] [2] Gu Zhun, 顾准, (July 1, 1915 – December 3, 1974), a contemporary scholar, thinker, economist, and accounting scientist in China.