Skip to content

Red Flag Manuscript: Develop and Expand the State Economy

[Editor’s Note: Red Flag Manuscript published an article that pointed out how critical the State-Owned Economy is for China in its current stage of development. The article argued that the world is in an era of capitalism in which financial monopolies prevail. In this era, the dominant force is the international conglomerates that have monopoly or oligopoly positions in an industry. Therefore, China should also develop and expand its State-Owned Enterprises (SOEs) so it can stay alive. The author, Zhou Miao, is from the Institute of Marxism at the China Academy of Social Science. The following is an excerpt from the article.] [1]

In today’s world, with the exception of a small number of new industries, oligarchies and monopolies dominate most business sectors. These oligarchies and monopolies operate on a global scale. This situation has had a profound impact on the world’s political and economic environment. Therefore, it is very important to consider how China’s state-owned economy will develop within this framework.

I. Multinational Companies Are the Biggest Winners in the Era of International Financial Monopoly Capitalism

The formation of global oligarchies has propelled capitalism into the era of international financial monopolies. Different kinds of international financial monopolies dominate the world’s economic development. These global companies make most of the important decisions in all economic areas, including investment, finance, production, sales, trade, science, and technology. In the meantime, the model for the control of financial capital has transformed from the traditional pyramid, with vertical control, into a joint control network centered on the banking industry. Through participation, financial capital is able to control a large number of economic and manufacturing industries. Financial capital has direct control of parent companies and uses these parent companies as leverage to control more subsidiary companies at all levels. The subsidiaries also own each other’s holdings. The result is a large scale international network controlled by financial oligarchies.

The vehicles for international financial monopolies are giant global companies. These companies all seek growth in global markets. They want to become monopolies in both domestic and international markets. These companies dominate the global market and have established a global production system. Through public investment, global manufacturing, and information/network based management, they control the world’s technology, capital, production, sales, and marketing. They decide the economic direction and order for the world.

These global companies typically have a global strategy and integrated management. They are large, strong, and complex. They often focus on one core sector and branch out into other related businesses. They build subsidiaries and departments in different regions to create an integrated global network of research and development (R&D), production, and sales. They have advanced management capability, advanced technology, strong capital, and have achieved an astonishing scale in sales and profit. Many Fortune 500 companies have even more economic power than some middle-sized countries. They dominate the world’s industries and markets in their respective sectors.

Their large scale, diverse products, complex structures, and big markets require these companies to establish a highly effective management structure, which enables them to use resources more effectively and to maximize profit. These companies have a complex structure. Their formation and evolution into a mature structure is based on the needs of centralizing manufacturing. In recent years, some new business models have emerged, such as holding companies, global Internet structures, virtual companies, and borderless enterprises. However complex, these companies are integrated structures that use planning and management at different levels to coordinate and launch their global strategy. Despite their complex structures and their many subsidiaries in different parts of the world, these global giants can streamline their decisions, achieve integration within the company hierarchy, avoid duplicated production and sales operations, and secure company interests. In addition to their core business, these global giants usually invest in diverse products in one or more industries. Their businesses range widely from producing instant noodles to missiles. Diverse businesses allow them to become monopolies in multiple business chains, not only in product circulation, but also in a combination of manufacturing and circulation. They grow from a single industry to multi-industry conglomerates. These oligopolies or monopolies have evolved from “horizontal” (multiple product lines) to “vertical” (industry integration).

II. International Capital Has Leveraged Multinational Corporations to Impose a Huge Influence over Developing Countries

A. International Financial Monopoly Capital Uses Global Companies to Establish New and Unequal Global Divisions of Labor. (Omitted)

B. Global Companies Use Mergers and Acquisitions to Control Developing Countries’ Industries. (Omitted)

C. International Financial Monopoly Capital Uses Global Companies to Control Technology and Thus Keep Developing Countries in Subordinate Positions. (Omitted)

D. Global Companies Use Their Global Advantage to Avoid Taxes, Causing Some Developing Countries to Make Little Profit Despite the Large Scale of Production. (Omitted)

E. Global Companies in a Small Number of Developed Nations Have Obtained the Power to Set Prices in International Trade. (Omitted)

III. Developing a State-Owned Economy during the International Financial Monopoly Capitalism Era

The state-owned economy is the foundation for China’s socialist economic structure. It is the pillar for the national economy, an important force, and a source of social productivity. It is the basic guarantee for the national security of the economy, politics, and society. It is also the key to maintaining and bolstering our socialist superstructure and the government. When facing those powerful global financial giants and those multinational conglomerates that have strong resources, economic scale, and a nimble structure, our only approach is to develop the state-owned economy in order to compete with these foreign companies. It is our only way to improve national productivity and prevent these global monopolies from hurting China’s economy.

A. In this primary stage of socialism, we must unequivocally adhere to the dominant position of the public ownership economy. Some people believe that SOEs can only exist in the fields of providing public goods, non-competition, and non-profit and that they should exit the general, competitive, and for-profit fields. These people believe that SOEs should only provide services to other companies but not compete with private and foreign businesses. In their minds, this so called “state-back-out-private-move-forward” (国退民进) policy is a fundamental strategic adjustment that the state-owned economy should make.

This view is incorrect. In today’s globalization and rapid technological advancement, which industry is not competitive? In a unified market, except for a few monopolized industries, almost every industry faces competition. Many competitive industries are critical to national security, the national economy, and people’s livelihoods. If all SOEs bail out of these areas, our nation’s political and economic security will be compromised.

For example, commercial service is a competitive field. Recently, however, people have learned something about large commercial enterprises. After the 2011 earthquake in Japan, transportation and logistics in Fukushima were interrupted and relief supplies could not reach the victims. But in the 1995 Hanshin earthquake in Japan, Daiei supermarket and several other franchises used their logistics system to deliver relief supplies to the victims on time. It is evident that commercial franchises can be organized into a relief network. Some scholars have suggested that both state and private industries be combined to form a new kind of enterprise focusing on national scale logistics, controlled by the government using equity-holding, guidance, regulation, and strategic material reserves. It would stabilize the market price and uphold social responsibility. The organization in peacetime is a national fast-moving consumer goods (FMCG) distribution system. In wartime, during natural disasters, or in a volatile market, it becomes a centralized logistical support, disaster relief system, and market price stabilizer. The state will own equity in these enterprises. The enterprises’ foundations are the franchised supermarkets across the country. It connects supermarkets with farmers and integrates domestic and foreign trade, procurement, wholesale and retail sales, and distribution.

B. Development of the state-owned economy requires a proper relationship between the private sector and foreign capital. According to other countries’ experiences, many developing countries classify their domestic industries into different categories: one is the state monopoly, including strategic and sensitive sectors such as the military and key industries. Private and foreign capital are not allowed to invest in this category. Another category is the industries which need low investment, where local capital already controls certain-sized investment and technology, and whose products are for the domestic market. This category is run mainly by domestic private capital. Of course, the government allows and encourages these private companies to cooperate with foreign businesses on the technical and operational level. Depending on their specific economic goals, many countries make regulations that reward and guide foreign investment. These policies and measures have generated some substantial results.

We should pay attention to some areas when attracting foreign investment: First, we must pay attention to the quality of foreign investment. We should focus on attracting the foreign companies that improve our technologies and resources and that produce less pollution. Second, we must restrict the tendency of foreign companies to form monopolies. Third, we must strengthen Chinese companies’ independence and innovation efforts. Past experience shows that the multinationals always have strict control of their core technology, key technology, and the most advanced technology. Opening China’s market will not get these technologies in return. We must improve our independent innovations and make breakthroughs in core and key technologies.

C. We must balance the relationship between upholding state ownership and antitrust. There is no conflict between the principle of antitrust and having big, strong SOEs. During the international financial monopoly capitalism era, competition among enterprises is not confined to domestic companies, but also applies to multinationals. In order to enhance the competitiveness of domestic industries, many countries have relaxed restrictions on domestic monopolies. Their governments even actively promote domestic mergers. As early as the 1950’s, the Japanese government implemented policies to encourage mergers as a way to increase company sizes. In the 1990s, the U.S. also began to relax regulations on mergers and acquisitions. Microsoft illustrates the relationship between a monopoly and the national interest. As the largest software company, Microsoft holds 80 percent of the world’s software market. In 1998, the U.S. Justice Department launched an antitrust lawsuit against Microsoft. The lawsuit planned to cut Microsoft into two companies in order to safeguard competition in the software market. Out of its concern for the U.S. national interest, the Justice Department eventually withdrew the case because Microsoft is the leader of the information industry in the U.S. and the information industry is critical to the U.S. economy. Dividing Microsoft would have had a serious negative impact on the industry and jeopardized the leading position of the U.S. in the information industry.

Compared to developed countries, China’s companies are relatively weak and small, with a low industrial concentration. Therefore, antitrust is not the same as opposing a large scale economy and giant SOEs. The purpose of antitrust is to prevent big companies from abusing their market dominance, obstructing technological development, and harming the interests of consumers and other businesses. We should unify our effort to improve the socialist market economy, practice antitrust, and bolster SOEs.

Owing to the character of natural monopolies or administrative monopolies, China’s utility industries have traditionally been monopolies. These industries provide products or services directly related to people’s daily life and China’s national security. Therefore, these industries are predominately state-owned. The natural monopolies clearly benefit from economies of scale. Competition in these industries would cause a serious waste of resources. Therefore, antitrust laws in all countries grant an exemption to natural monopoly industries. China is undertaking reform in monopoly industries, including electric power, telecommunications, railways, civil aviation, and petroleum, introducing competition and allowing private capital into these fields. This is necessary. However, in order to ensure national political and economic security, we must ensure that the state-owned economy dominates these industries. We must strengthen supervision of private investment operations and improve laws and regulations.

In summary, during the international financial monopoly capitalism stage, China’s state economy has seen steadfast in its development. SOEs must be bigger and stronger in order to compete with foreign companies, deter multinational monopolies, and defeat their practice of price manipulation, production output control, and market dominance. That is the key to safeguarding China’s political and economic security.

[1] Red Flag Manuscript, Issue 2013/12, “We Must Develop and Expand Our State Economy in the International Financial Monopoly Capitalism Era.”
Also available: Qiushi Theory Online, “We Must Develop and Expand Our State Economy in the International Financial Monopoly Capitalism Era,” June 26, 2013.