1

State, market, and the Party in Chinese capitalism

Whether a little more plan, or a little more market; this is not the fundamental difference between socialism and capitalism. The plan and the market are both economic tools.

Deng Xiaoping (1993)¹

The Party is everywhere, in all institutions, and [with] influence over all people. But the way it works is invisible, like in that American movie Fight Club. The first rule is that you don’t talk about it.

Beijing investment banker²

Since Deng spoke at the outset of the reform era of the construction of ‘real’ banks (Han 1995), the ongoing reform of the financial sector has left it unclear to many – observers and participants alike – exactly what this role is and what it should be. Nevertheless, the CCP’s pursuit of an increasingly efficient economy whilst guarding against any political risk has been premised upon its capacity to retain control over the flow of capital and the related preservation of monetary and fiscal autonomy. In this way, the course of market-oriented economic reform, even as it has redefined the relative role of the state, has simultaneously intensified the political-economic importance of the CCP. Out of an analysis of how the financial system has been deployed by the CCP since the conception of the socialist market economy following the 1989 Tiananmen Square protests, this book sheds light on how the CCP has constructed capitalism. This is a capitalism that has not only reshaped but itself has also adapted to the social structures of contemporary China, and in ways that now defy the traditional analytic categories of Western political economy.

I examine how this process of ‘communists constructing capitalism’ has been underpinned by historically distinctive cognitive frames concerning the relationship between financial capital and socio-political authority. These frames are a product of deeply embedded social norms and structures coalescing with the opportunities and constraints – both discursive and material – generated through China’s interaction with the global political economy. Accordingly, the financial system has continuously occupied a unique position at the centre of the broader political economy. Through analysis of the path of financial reform since the early 1990s, I trace the implications of the duality of the role that it fulfilled under the aegis of CCP control, firstly as an economically effective mechanism for financial intermediation within the real economy, and secondly as a politically effective mechanism for preserving centralized power and authority over the benefits of that financial intermediation. The institutional and regulatory reforms that took place during the 1990s and 2000s do not overshadow the continuity of this function. Indeed, as will be discussed in later chapters, those reforms were in many ways structured specifically around the need to preserve the integrity of this duality.

The development of the banking system is less a story of obstructed or stalled reform, but more one of a commitment to pressing against the limits of the growth model and engaging in a form of brinksmanship with the financial crisis in an effort to secure enough material wealth in order to ameliorate the effects of capitalist accumulation. This effort to ‘buy time’ through accumulation, and to ‘do enough’ to address social conflict and preserve social stability, is what distinguishes the modern epoch of capitalist accumulation from either a traditional conception of free market laissez-faire capitalism or of the true ideal of the developmental state. This was the guiding principle that has accompanied reform since the early 1990s, and it can still be witnessed today as the CCP continues to actively engineer the process of development in a way that ameliorates the worst excesses of capitalist growth. More broadly, it serves ultimately as a demonstration of just how antithetical capitalism is to democracy. The role of the CCP in constructing an authoritarian capitalist society illuminates not just how the development of capitalism has affected China, but how China affects our conceptions of capitalism.

These arguments engage two long-standing conceptual fractures in contemporary political economy. The first concerns the relationship between the domestic (or the local) and its relationship to the international (or the global), the second that between the political logics of the state and the economic logics of the market. How the political problem is resolved in China via the economic, and moreover how the economic solution is in turn underpinned by the political, is one of the most central and intriguing aspects of China’s path to reform and opening.³ This process is in turn connected intimately to the evolution of the global political economy, as capitalist development has come to form the central objective of reform-era Chinese society. Recognizing the extent of the interpenetration of the political and the economic transforms the question of how China ‘became’ capitalist. Rather than one of the waxing and waning of state economic power and the political agency of private economic actors as China embarked on a new era of development, it becomes one of how structurally entrenched imperatives – both domestic and international – are constraining certain individuals, networks, and institutions whilst generating political resources for others, within an increasingly interdependent global system.

The book therefore addresses these fractures between the universal and the local, and the political and the economic, by approaching the ‘China question’ from an alternative perspective – one that de-emphasizes the state versus market dichotomy and instead focuses on the socio-economic foundations of power and authority that manifest through the financial system. At the core of a global political economy that has given rise to these analytical fractures reside multiple systems for mediating the flow of capital and resources necessary for modern economic activity and production. Finance – and more specifically financial capital – penetrates the political realm as well as the economic, whilst also forming a critical set of linkages between the domestic and the international within the global political economy. This leads to the question of finance and its duality of purpose – as a system of financial intermediation as well as political control. It further points towards how the role of China’s financial system is crucial in China’s emergence into the global political economy as breaking down barriers between not only the political and the economic, but also between the local and the universal. This book speaks not only to the study of China’s political economy and the theoretical and conceptual debates that surround this endeavour, but also to more fundamental questions concerning how the universal coalesces with the local at the point of what remains fundamentally but not exclusively the international.

In this manner the book seeks to answer Kellee Tsai’s call for scholarship to better ‘show what China can do for political science, both empirically and analytically’ (Tsai 2013, 860). It does so in three related ways. First, it provides an insight into the nature of China’s socialist market economy, probing China’s development as a resiliently non-liberalized political economy that underpinned stable, rapid, and yet unsustainable economic growth. This is an empirical paradox that has not yet been adequately addressed, and I place the role of the CCP at the heart of this examination. The role of the financial system in China’s development has, as for all other financial systems in the world, been underpinned by a set of ideas and institutions that enable socio-political uncertainty to be evaluated, financial risk to be managed, and economic activity to be undertaken. The book shows how this process in China has revolved, not around an equilibrium reached between state regulation and market freedom, but around the role of the CCP as the primary source of confidence and faith in financial stability and economic growth.

This gives rise to the book’s second objective, which is to explore how such a perspective overcomes some of the limitations of studying the political economy of financial capitalism that arise through a focus upon the distinct institutional categories of the state and the market. The role of the CCP as conceptualized in this book illustrates the difficulties of relying upon these categories to understand the intersection of universal logics of economic development and the particular social institutions through which these logics manifest. The study represents an attempt to overcome these conceptual limitations and provide a means of grappling with the empirical problem of explaining paradoxical trends in China’s politico-economic development at the same time as generating insight into what China’s post-1989 financial development can tell us about the nature of contemporary political economy as contemporary capitalist political economy.

The third objective of the book is accordingly to place these investigations in the context of the long-run evolution of the global political economy and to destabilize conceptions of China as ‘just another actor’ that is still comprehensible on the basis of concepts and theories of socio-economic action rooted in ‘Western political economy’. China’s experience of financial reform and economic growth demonstrates the significant scope for reconfiguring understandings of how financial systems affect the course of socio-economic development within contemporary global capitalism. The distinctiveness of the interaction between political authority and financial capital in China has the potential to profoundly disrupt the presumed resilience of the global liberal order, even as capitalism itself as a mode of social organization comes to be increasingly entrenched within this global order.

An ongoing puzzle: the socialist market economy

Xi Jinping’s remarkable political ascent, reaching its peak at the Nineteenth Party Congress in late 2017, has starkly highlighted the twin faces of China’s evolving capitalism: a resiliently illiberal authoritarian political system in conjunction with increasingly market-oriented economic reform and restructuring. He has emerged as not only the most powerful Chinese leader in decades, but also the most committed ideologically to the intertwining of the CCP’s fate with that of the Chinese nation. In addition to contributing his eponymous philosophy to the CCP’s constitutional canon and embarking on a historic campaign of both Party-cleansing and Party-building, he rapidly consolidated his dominance over the policymaking institutions of Party, state, and military with his creation at the 2013 third plenum of two new central leading groups – one for State Security [国家安全领导小组], another for Comprehensively Deepening Reform [全面深化改革领 导小组]. Through his leadership of these two crucial bodies, he therefore obtained ‘omnipotent power’ (Zheng and Gore 2015), which he has wielded across all areas of society, media, and the Party itself. Amongst a plethora of others, these groups at the apex of the Party’s policymaking apparatus symbolize the concurrent enmeshment of political and economic issues under Xi’s sole authority. The separation of politics and economics, at most a tenuous conceptual fiction in the most liberal or laissez-faire of societies, is now thoroughly non-existent in Xi’s China.

Although heated debates continue around the nature of China’s ‘intra-party democracy’ [党内民主主义] (Bell 2015), the overall trend towards a deepening of centralized authoritarian control under the CCP is clear to see. There is considerable evidence of the institutionalized underpinnings of the CCP’s resilience (see Gore 2014; Zeng 2014; cf. Li 2012; Fewsmith and Nathan 2018), and Xi Jinping’s efforts to further consolidate personalized political power should be viewed in terms of continuity of a long-standing trend, rather than a rupture with it. At the same time as clamping down on political expression and other civil liberties, Xi Jinping entered office committed to economic reform, vocally exclaiming ‘market decisiveness’ [市场的决定性] as a core element of China’s future economic trajectory (Naughton 2014). On top of this is the drive towards ‘national rejuvenation’ [国家复兴] and the aspirational sloganeering surrounding the realization of the ‘Chinese Dream’ [中国梦]. Even though the ideological thicket of the political discourse emanating from Beijing can often seem as if it is deliberately intended to obfuscate as much as clarify, the common thread remains the leadership and unquestioned authority of the CCP.

The dilemma of Chinese governance to which the CCP is responding in such fashion was posed by Wang Huning (1988, 1) in his early writings on centre–local relations:

If power is not transferred to the lower level it will be impossible to invigorate the economy and move it toward modernization; but the transfer of power to the lower level brings with it extremely great difficulties to the regulation and control by the political system.

As I argue in this book, any system of Chinese governance inevitably has roots in the historical development of Chinese society and is deeply embedded in Chinese cultural norms and attitudes towards financial capital itself. Although the CCP has marshalled increasing and enhanced authority over the institutions of state and market, it is by no means a recent development, and the Party’s current organizational and ideological reinvigoration under Xi Jinping can be seen as the latest incarnation of the attempt to grapple with a long-standing dilemma of Chinese governance.

These intertwined paths of political and economic change are embodied in the evolving concept of the ‘socialist market economy’ [社会主义市场经济], and particularly in the nature of the financial capital at its heart. Much scholarly and popular discourse tends not to provide very good answers to the question of how and why the financial underpinnings of this system operate as they do. Although recent work has explored these deeper ideational underpinnings of economic reform in the state-owned sector and strategic industries (Eaton 2016), there is a peculiar lack of similarly rigorous analysis that homes in on the role of the financial sector in supporting this process. Both in China and throughout Western commentary, the dynamics of financial reform and of restructuring the state-owned industrial and manufacturing sectors are often perceived in terms of the challenge of identifying and realizing rational developmental principles. According to this view, political power struggles between ‘conservatives’ and ‘reformers’ in Beijing are relevant insofar as they may threaten to derail or delay these efforts, but do not determine what is considered to be the most rational developmental policy (Lardy 1998; Huang 2008; Shih 2008; Walter and Howie 2011; Nee and Opper 2012). These accounts tend to analyse the development of China’s political economy against an implicit counterfactual of (for example) the World Bank’s nine components of what is ‘generally considered to constitute a comprehensive reform program’ (Hellman 1998, 223), and in so doing come to conflate reform with market liberalization.

Yet it is increasingly clear that change in China’s political economy, and especially within China’s financial sector, is not necessarily predicated on a teleological conception of a system that will eventually come to resemble a liberal market democracy. The assumptions underlying these mainstream analyses deflect attention away from more nuanced consideration of the kind of market economy that reform is directed towards. This book presents evidence that a key underlying reason for the unique and peculiar path of financial reform since the early and mid-1990s has been the CCP’s active and deliberate construction of a financial system that would serve both the economic function of economic growth and accumulation as well as the political function of continued CCP control. In making this argument, this account complements existing partial explanations, militating against relying exclusively upon interest-based and institutional frameworks in order to explain the dynamics of financial reform. It was neither factional stalemate between Jiang Zemin and Zhu Rongji (Shih 2008), the urban biases of the increasingly technocratic leadership (Huang 2008), nor vested interests entrenched in the under-performing state-owned sector (Lardy 1998), that should be considered the root cause of ‘illiberal’ financial reform. These existing narratives each miss elements of the overall trajectory of reform and, more importantly, miss the profound implications of what was in fact a much more concerted intersubjective understanding of the bases for growth, reform, and development that were embodied within the financial system.

Shih’s factional account of elite politics in the 1990s rests upon the observation that, ‘unlike the usual portrayal of technocrats who were either agents to political principals or “insulated” technocrats operating beyond the pull of politics, technocrats in China were highly politicized’ (Shih 2008, 160). However, the political and economic demands upon the top leadership came to produce as much a cohesiveness of perspective as much as factional infighting. Shih’s factional model generates a degree of insight into how personal political priorities sewed discord between members of the CCP elite in the waning years of Deng Xiaoping’s authority. However, it provides very little sense of how the CCP was capable of so effectively mitigating the excesses of these inflationary cycles, the extent to which its approach to reform of the financial system itself was crucial to this success, and why this would ultimately produce a political economy that bound together the interests of both state, market, and society in the uninterrupted pursuit of economic growth. As Cheng Li (2016) has observed in discussing China’s peculiar brand of ‘bipartisanship’:

From a collective perspective, both [factional] camps share fundamental goals: maintaining China’s political and social stability, promoting continued economic growth, enhancing China’s status as a major international player, and, most important, ensuring the survival of CCP rule.

As a result, almost entirely missing from this literature is the unpacking of the deeper connection between the social and cultural context out of which these political debates emerge and how this context redefines the very basis upon which economic and political rationality is constructed and pursued. Political power struggles are themselves rooted in and resolved by ideological contests (Tu 1993). Indeed, as Misra (1998, 8) has argued, ‘the interaction between ideas, ideology, power conflicts, and policy formation is much more complex than is conceded by the power-interest and bureaucratic politics approaches’. One must turn to a deeper stratum of analysis in order to understand the social, discursive, and ideological foundations of China’s economic development.

Approaching the study of China’s political economy in this manner therefore does not directly challenge other theories of decision-making in contemporary China. Accounts of China’s reform trajectory derived from concepts of the developmental state, models of bureaucratic power politics, complementarities of institutional design, or bargaining dynamics of central–local relations each offer useful insights into China’s historical and current path of development. However, if the goal is instead to explain not just economic growth and macroeconomic stability, but also the broader question of how these dynamics are embedded in a longer-run trajectory of sociocultural and politico-economic evolution, then it is necessary to develop a dynamic theory that could ‘capture the forces producing change in the system’ (Oksenberg 2001, 28). In his attempt to do more than simply provide a static description of that system, Oksenberg (2001, 28) could do little more than point to idiosyncratic and ad hoc factors that were ‘generating an evolution of the system, but in an incoherent and uncoordinated fashion’, concluding that ‘increasingly, the system has a disjointed, byzantine quality to it’. In developing a theory of the CCP and its relationship to financial capital, the goal is therefore not to entirely supplant other frameworks of Chinese political economy, but to generate a greater analytic coherence to the diverse multitude of factors that are driving China’s political economy.

The CCP’s sinews of financial governance

The central importance of the CCP in the increasingly modern and rationalized institutional fabric of contemporary Chinese society thus comes more sharply into focus. The principles through which the CCP underpins Chinese society have a systemic quality; they permeate the institutions of the political economy and its governance, such that the operation of formal institutions is infused and overlaid with what amounts to a non-state and non-market set of institutional dynamics. As it has presided over an increasing rationalization of the various structures of governance, the CCP has also rationalized itself as a ‘governing party’ (Heath 2014), embracing such concepts such as ‘scientific management’ [科学 管理], ‘system-building’ [体系建设], ‘regularization’ [正规 化], and ‘institutionalization’ [制度化]. The process of building a modern capitalist state bureaucracy in no way entails what many believed to be an eventual withering away of the Party’s central role, but rather involves enhancing the function of the state as a tool – itself in turn overseeing the market as a tool – in service of the CCP’s overarching developmental mission and vision of society.

China’s banking system has increasingly come to resemble the institutional configuration of any other modern system of financial intermediation, and yet the core feature of financial institutions in China remains their duality of function under the authority of the CCP (Gruin 2013), transforming in turn the nature of financial markets and the broader institutional fabric of capital itself. Modes of technical management through ‘Western’ concepts of banking supervision and regulation are established, but Chinese institutions and principles distinctively influence the manner in which they work. Capital is transformed from a tool for the exercise of ostensibly market power, into a tool for the market-situated exercise not of state power, but the power of a group of actors whose role is inextricably bound up with both the productive functions of the market but also the governance functions of the state. Stent (2017, 20) describes the resulting hybrid character of Chinese banks as:

neither wholly a creature of the market, nor wholly an agent of the state … they are viewed by the government ultimately in instrumental fashion. Banks exist to play a role in the overall economy, the financial intermediation role. They are a means to an end, not the end in itself. In creating this hybrid culture of banks, China attempts to have its cake and eat it too – realize the efficiency of market-driven, competitive management, while at the same time retaining ultimate control of the banking sector and guiding bank operations at the macro level in support of broad economic policy.

To achieve this, the CCP functions as an organizationally distinct and coherent system of policy development, promulgation, implementation, and enforcement. As it has embraced the conceptual framework and institutional architectures of a socialist market economy, the CCP has nevertheless adapted itself and its relations to other governance structures in order to consolidate its real authority over a rapidly evolving political economy. Developing the effective duality of the financial system as a mechanism for macroeconomic governance and financial intermediation, and thus as a mechanism for economic growth and political control, has relied heavily upon the ability of the leadership to diffuse its policy preferences and priorities. Party discipline was at the core of Zhu Rongji’s (2013 [1993], 134) emphasis upon the ‘unification of thinking’ [统一思想] and reconciling the disparate elements of the newly emerging institutional function of the banking system. Although the state apparatus continued to fulfil its functional role in crafting industrial policy, drawing up the credit plan, and issuing guidance to bank managers, it was the CCP that was necessary to set the underlying objectives and parameters of these functions, as well as ensure that the state fulfilled them.

The Party operates through horizontal and vertical networks of coordination and hierarchy intended to provide a uniform set of understandings of central CCP priorities and objectives, which are then reinforced through overlapping networked bonds of guanxi, meaning dyadic social ties (关系), and reciprocal obligation. This is evident throughout China’s financial elites, who constitute a dense and overlapping network of Party cadres that connect all the important entities in the financial system and comprise the core of China’s governance regime for finance.⁴ As the process of marketization unfolded, the need to establish modern institutions of finance came to clash and then be resolved with the system of ‘parallel rule’ that had been adopted from the Soviet model of ‘police-patrol’ oversight (Shirk 1993, 57–8). Parallel rule ensures that the Party is responsible for all important appointments of officials within the financial system, that it possesses a strong organizational presence in the form of Party committees in every financial institution, and that financial institutions can be directed to pursue national economic objectives (Stent 2017). As Pistor (2013, 3) has argued in relation to the control over appointment of financial elites by the CCP,

[Human resources management] has become a substitute to direct state control, which was still pervasive in China until the end of the 1990s, and a complement to the new rule-based formal mechanisms of control. The CCP’s control over [HRM] intensified as the state apparatus loosened its direct control over the financial system.

The para-institutional network that is the CCP cadre system is rooted in the Party’s ‘position-list’ [职务名称表] system, at its core a list of positions for approximately 5000 Party officials [中共中央管理干部职务名称表].⁵ It is administered by the Organization Department of the CCP, a highly secretive yet incredibly influential Party organ.⁶ As one Ministry of Finance (MOF) official stated in relation to the contemporary role of financial elites, ‘the chairmen of the large banks cannot be said to be purely bankers. They are politicians.’⁷ At the heart of this remains a focus on the incentive structure for banking management and behaviour. The social responsibility and political fidelity of senior banking management must be achieved, whether through informal moral persuasion or through overt material measures, and constitutes a fundamental component in achieving a balance between profit and responsibility. As Liu Mingkang, then head of the CBRC, pointed out in 2008, ‘whether the incentives for increased performance are sourced in market profits or social advancement, regulatory and governance structures must be capable of achieving this balance’ (Liu Mingkang 2008a).

Horizontally, during the 1990s, the appointment of all leading financial cadres was overseen by the Central Organization Department (COD) under the 1990 position-list.⁸ The capacity of the Party to control the transfer and promotion of these cadres was strengthened, as cadres such as Zhou Xiaochuan, Wang Qishan, Dai Xianglong, Liu Mingkang, Guo Shuqing, and Shang Fulin were rotated progressively through the primary financial institutions that were emerging in the early 1990s: the five SOCBs, three policy banks, the People’s Bank of China (PBOC), the CBRC, the China Securities Regulatory Commission (CSRC), and the State Administration of Foreign Exchange (SAFE). One former SOCB party committee member described this process of rotation and placement in the following terms:

They don’t think the same way, but all of the top financial guys have spent their careers being moved around by the Party, through the central bank, the state banks, the regulators. They have different ideas about how to do it, but they all know that their careers depend on protecting the Party. And the ones who are at the top now, they were groomed beginning in the early 1990s.⁹

Vertically, they functioned through hierarchical injunctions and the instillation of Party discipline amongst cadres. After every major Party meeting or financial work conference, comprehensive Party-led study meetings were convened in order to determine how to implement the objectives and realize the intentions of central leaders. For example, in 1993 following the Fourteenth Party Congress at which the goal of constructing a socialist market economy was proclaimed, the Bank of Communications organized meetings for all branch managers to meet, at which the Bank President Dai Xianglong, who would later be appointed governor of the PBOC in 1995, gave a speech that laid out his vision of a ‘socialist commercial bank’ (Dai 1993). The role and duty of cadres within state-owned firms is thus to provide moral and political leadership, frequently through political and ideological study sessions, a role that has not only retained its salience through the reform era but which has been progressively upgraded and enhanced since the late 1990s (Heath 2014). Another former SOCB Party committee member recalls the manner in which they were compelled to read, study, and then debate Dai Xianglong’s ‘instructional handbook’ (Dai 2001) for leading cadres involved in financial work.¹⁰

These organizational features are necessary but insufficient elements of economic governance that also secure the CCP’s political endurance. Functions are not objectively assigned to institutions and organizations, nor are they structurally immutable. Rather, it is the social acceptance of these institutions and, crucially, the terms of that acceptance that are significant. CCP authority rests ultimately on the ideological integrity of its status as the sole guarantor of Chinese economic and social development. As later chapters explore, when transposed into the context of financial development it is this status that reduces uncertainty, generates confidence and faith, and thereby generates an underlying basis for financial activity and investment. At a general level, the guiding ideology of ‘socialism with Chinese characteristics’ constitutes a sociologically performative system of thought that not only provides substantive guidance on the principal contradictions of Chinese development, but also justifies the CCP’s undisputed authority to define and resolve these contradictions.

China’s challenge to contemporary political economy

Integral to any attempt to understand the process by which China’s communists constructed capitalism is the challenge of identifying the drivers of change in China’s political economy. The second major argument I develop in this book is that the difficulties encountered in making adequate sense of China’s political economy reflect deeper issues in dominant perspectives in political economy. These issues revolve largely around how we conceptualize the state and the market, recognized as the ‘key controversy’ (Zhao 2017, 7) at the centre of debates over China’s economic development. At its core, this can be distilled to a problematic broader tendency to view political economy as largely constituted by a mutually antagonistic relationship between a regulatory state and a competitive market.¹¹

Although recent advances in the political economy of development have enabled much more nuanced perspectives on the interrelationship between state regulation and market competition, China’s experience of development provokes us to further examine the concepts that we use as proxies for these political and economic dynamics. Abrams (1988, 58) describes this problem of reification elegantly: ‘The state is not the reality which stands behind the mask of political practice. It is itself the mask which prevents us from seeing political practice as it is.’ Although market actors and state actors are real, markets and states themselves are not. They possess agency only as conceptually delimited bundles of individuals, institutions, and ideas. Given that markets and states are not immutable, objective facts, it makes sense to think of them not as ‘real’, but ‘as if real’ (Hay 2014), an ontological distinction that passes with little fanfare in everyday practice, but which comes to be analytically important when developing social scientific concepts that travel across both space and time.

Although these are conceptual issues that afflict analytical frameworks across the fields of international and comparative political economy (see Underhill 2000; Underhill and Zhang 2005), they are especially acute in the case of China, for which there is a temptation to regard much of the actual operating practices of governance as anomalous and analytically insignificant, insofar as they fail to fit more or less neatly into one of the existing foundational conceptual categories of political economy: the state or the market. State intervention is either praised as an effective developmental mechanism, or it is condemned as a harmful obstacle to an efficient set of market mechanisms. These prevailing perspectives are simplified and depicted in Table 1.1. An orthodox ‘competitive markets perspective’ account of China’s banking reform generally traces the gradual uncoupling of the banking sector from direct state control, arguing for the incompleteness of this process of graduating from state-directed lending to profit-driven capital allocation (Lardy 1998; Pei 1998; 2006; Kwong 2011; Walter and Howie 2011). Rooted in a linear and unidirectional market transition theory (Nee 1989; Nee and Opper 2012), the competitive markets perspective assumes that increasing marketization, consolidation of property rights, and the assumption of financial risk by private actors within the financial sector will deliver greater economic efficiency and greater social equality.¹² Much of this literature on the role of the financial system in affecting the path of socio-economic development focuses upon the relationship between financial liberalization and economic growth (McKinnon 1973; Shaw 1973), and evidence of the positive correlation between the two (Roubini and Sala-i-Martin 1992; Levine 2005). However, as a result of this focus, such approaches approach the paradox of China’s development by addressing only two cells of Table 1.1: growth-generating competition on the part of private actors, and growth-retarding corruption or monopoly on the part of public actors (Lü 2000; Bernstein and Xiaobo 2003). The existence of effective state capacity, and the financial elites that underpin it, are regarded as epiphenomenal at best, and as accentuating corruption and vested interests at worst.

Table 1.1. Perspectives on Chinese economic development

Alternative accounts of China’s banking and financial reforms, under the label of the ‘developmental state perspective’, dispute that China’s financial sector has necessarily performed in such a suboptimal manner as is commonly argued. The developmental state perspective also places analytical emphasis upon only two of the cells of the table; however, conversely this time it is active state developmentalism that is viewed as largely responsible for facilitating such rapid economic growth (Knight 2014). These perspectives are problematic because they are each characterized by the assumption that the institutions of the market and the state are inherently driven by distinct logics of action, leading them to unjustified predilections for either emphasizing the negative (the competitive markets perspective) or the positive (the developmental state perspective) outcomes of a state-controlled and financially repressed banking sector.

By problematizing the concept of the state as a macro-holistic actor, China scholars have taken valuable steps in probing the nuanced balance between state and market forces in China’s economic development. Walder (1995) and Oi (1995) have identified the importance of local state actors in driving China’s growth, thus adding another dimension to the market transition theory, one which involves a transfer of economic power from central to local authorities. This strand of literature rightly draws attention to the fact that the devolution of both authority over both capital and policy development has been a crucial factor in catalysing local institutional adaptation and accelerating economic development (Naughton 1995). Yet these arguments nevertheless do not directly address a key question of the relationship between these two dimensions of institutional change in the reform era: whether decentralization entails more market or merely a reconfiguration of state authority. Notwithstanding significant devolution to lower levels of government and the accompanying competitive dynamics between local authorities, the role of the state vis-à-vis the market is still considered to remain largely intact. With her ‘co-evolutionary’ framework of directed improvisation between state bureaucratic institutions and entrepreneurial competition, Ang (2016) has made a significant contribution to our understanding of how economic growth necessarily entails an iterative dynamic between institutional development and market dynamism. Nevertheless, she pays less attention to the sociological glue that binds and guides actors across both the state-market and centre–local divide.

One of the central objectives of this book is to provide an alternative to the conceptual antimony between state and market, by pointing to the way in which capitalist economic development – as distinct from some timeless and ahistorical conception of either state-led or market-led development – rests upon contingent foundations that are both socially embedded and historically situated. Such social embeddedness enables actors straddling the public and the private – thus fusing together the state and the market – to coordinate social action in ways that can produce dynamic economic growth, yet also produce a concentration of power that shapes how that growth takes place and whom it benefits. Examining this social embeddedness in the context of the CCP and its relationship to the socialist market economy enables us to refine our theories of Chinese political economy, and to more effectively draw upon the Chinese experience and reflect on theories of political economy that have emerged out of the Western historical experience.

Jettisoning these assumptions involves a recognition that even as the integration of global production and the transnationalization of financial activity has brought ‘transitional’ and ‘developing’ countries firmly within the realm of the global capitalist system, the experience of reform-era China serves as a clear reminder that the processes of capitalist production can take place through socioculturally variegated and historically contingent institutional structures. As such, capitalism is a constellation of logics of action and cognitive dispositions, not a set of preordained economic arrangements that may be deductively conceived and assessed in a reductionist manner. Consequently, whilst the ideas and practices of capitalism transform those societies with which they come into contact, the historical lineages and cultural norms of societies in turn have profound consequences for the manifestation of capitalist ideas and practices.

This opens up the possibility of exploring an alternative perspective that recasts the political economy as displaying significant functional similarities between the institutions of the state and the market. On this view, China’s banking sector constitutes a set of both discursive and structural institutions that fuse together state and market actors, embodying a substantially different confluence of rationalities from either that of a commercially oriented system of intermediation premised on the underlying stability and efficiency of profit-seeking market actors, or of a banking sector rationally engineered by a group of wise and visionary bureaucrats. From this vantage point, the institutional reorientation of China’s financial system towards the prioritization of economic growth over social egalitarianism is not understood exclusively as the commercialization of lending practices and/or as a process of structural liberalization to open up the system to private capital. Nor should it be understood exclusively as retrenching state-controlled entities as the beneficiaries of directly political exchanges. Rather, the economic and political functions of the financial system conjoin, such that the increasingly commercialized structure of the financial system and the increasingly rationalized activities of financial institutions are directed towards strengthening not just the market economy, but a market economy over which the CCP ultimately remained ‘paramount leader’, with the ability to ‘bang the table’ [拍桌],¹³ and end the discussion.

In circumstances where such ambiguity exists as to the role of a state-controlled banking sector, it is not enough to retell the story of banking reform in China as simply one of state-embedded bureaucratic politics or of the inexorable pull of market forces. Rather, one must question the timeless quality of these concepts and the largely reified analytic weight that is placed upon them. Contrary to much mainstream political economy, social action cannot be conceptually black-boxed within either the state or the market. To theoretically demarcate these two categories – even for the purposes of studying their interaction – is to assume that for analytic purposes the behaviour of one actor is relevant insofar as it contributes to the explanatory significance of either the state or the market as a driver of economic outcomes. The level of institutional interpenetration apparent in Chinese governance as its leaders seek to simultaneously maintain political integrity and generate economic activity should motivate us to dispense with these epithets as theoretical ideal types and instead to look towards new conceptual horizons.

Reconceiving Chinese capitalism

As Chapter 2 of this book makes clear, this begins with placing the current dynamics of Chinese financial reform in the context of a historical process of economic development in which the relationship between the state, the market, and their relationship to patterns of power and authority held different meanings, which were utilized for different purposes. Only upon this basis does it become feasible to undertake a more fundamental conceptual redescription of the financial landscape of contemporary Chinese capitalism and its role within the broader transnational political economy, an objective at the heart of this book.

The central organizing concept for doing so is that of socio-economic uncertainty, the subject of Chapter 3. The challenge of understanding financial governance in circumstances where the dividing lines between public and private are blurred forces us to return to some fundamental questions of how logics of economic activity are generated, changed, and sustained. Focusing on how socio-economic uncertainty affects ideas, institutions, and interests enables the observer to analytically deprioritize the state and the market as proxy independent variables in and of themselves, but instead to treat them as intervening institutional fields through which logics of action can be played out. From this vantage point, the flow of capital through the political economy comes to be seen as modulated in terms of its relation to the socio-political authority of the CCP. Through the exercise of such authority, an ideologically robust and institutionally sophisticated organizational structure at the nexus of state governance and market-active financial institutions is capable of both managing socio-economic uncertainty so as to enable productive economic activity whilst also exploiting socio-economic uncertainty in order to shape the nature of that activity whilst also preserving political control. The CCP appears thus at the core of a coherent and institutionally flexible system of capitalist accumulation, rather than as either a rigid and ossified authoritarian organization encircled by capitalist market forces or as a committed adherent to the financial and economic liberalization that is often assumed to inevitably accompany economic commercialization and growth.

Socio-economic uncertainty is therefore a concept that takes us a long way in understanding how financial systems are implicated in processes of generating socio-economic stability, as well as variegated socio-political outcomes. The key to CCP control over the broader trajectory of economic development in China has been at once to embrace and control uncertainty. Mechanisms of CCP control reduce uncertainty, even as they concentrate the ability to do so within a particular social grouping. The need for these cognitive and institutional mechanisms for mediating (and thus translating) the social world into a comprehensible environment for action has traditionally been conceived of as being satisfied either by the structures of state regulation or structures of market exchange. In China’s emergence as a capitalist political economy, the role of the CCP disturbs these traditional categories of state and market as concepts capable of carrying serious analytical weight, not because the functional characteristics of hierarchical control or contractual exchange as a means of organizing socio-economic reproduction have been eliminated or even necessarily transformed, but rather because the imperatives of power-infused capitalist accumulation find expression in how the CCP itself constructs mechanisms for orienting action towards economic growth as a basis for satisfying the priorities of social stability and order.

Out of this conception of the CCP emerges an alternative means of telling the story of China’s financial reform. Rather than pitting mutually opposed logics of the state and market against each other, this book offers an account of economic growth, of financial stability, and of the concentration of political power as the product of what makes society and the political economy hang together, even if only in temporary and unstable constellations of interests and power. In this narrative, reform-era China has been marked by a series of socio-historically contingent critical junctures that have instilled and then retrenched economic growth as a fundamental policy priority, and catalysed a course of ideational and institutional change that has not only enabled economic growth and political authority to coexist, but has also produced a self-reinforcing relationship between a discourse of economic growth and a discourse of stable social development and progress under the political leadership and authority of the CCP. In the aftermath of the political and ideological turmoil of both the Cultural Revolution and the societally traumatic repression of the 1989 protest movements, economic growth came to be viewed as the primary, if not sole, basis for legitimacy. The opening of China’s economy during the 1990s, combined with the 1997 Asian financial crisis (AFC), came to reinforce this particular political logic of economic reform (cf. Shirk 1993), and despite the deepening of fundamental imbalances within China’s economy during the 2000s, the intertwining of political and economic objectives further propelled efforts to ‘build’ [建设], ‘strengthen’ [加强], and ‘perfect’ [完善] the CCP’s central role, even as economic and financial reform proceeded apace.¹⁴ Accordingly, economic activity has flourished, but at the heart of this growth has been the deployment of capital in a particular manner, one that enfolds the power of capital within the political structure.

This role of the CCP emerges out of a historical social order, the ‘rationality’ of which has been largely occluded in both the historiography of economic development, as well as the theoretical architecture of contemporary political economy. Zheng Yongnian has labelled the CCP the ‘organizational emperor’, the nature of which as socioculturally embedded has been downplayed as either epiphenomenal or analytically residual in the study of the state and the market from a Western politico-economic perspective.¹⁵ I do not claim that China’s contemporary socialism is essentially just the most recent incarnation of the country’s age-old tradition of absolutist state power (see Blecher 2003, 1), but argue for the need to adopt a dialectical approach to the rise of the CCP and the patterns of political authority at the centre of which it has come to exist. That is to say, neither the cultural-philosophical foundations of Confucianism that underpinned imperial rule from 221 BCE (Fairbank and Goldman 2006, 51–3), nor a transplanted system of political thought giving rise to a largely endogenous organizational dynamic of CCP rule, should be seen as exclusively responsible for the structuring of contemporary Chinese politics.¹⁶ Rather, the CCP reflects the deep rootedness of Chinese modernity within the enduring social orders that have and continue to characterize Chinese society and culture.

Organization of the book

These arguments are based on qualitative fieldwork that took place over the two-year period between April 2012 and April 2014, and between September 2016 and October 2017. Over sixty interviews were conducted with members of the Beijing financial elite. These interviews were conducted in Chinese and English with individuals currently working in or retired from the central ministries and regulatory agencies, the central bank, commercial banks including all of the ‘big five’ SOCBs, recently emergent information and communications technology (ICT) firms, and a number of government think tanks and universities. These semi-structured interviews lasted on average one hour, and generated direct insights and information about the process of financial policymaking, the role of the CCP networks in the financial system, and the function of the legal and social institutions underpinning financial and economic activity in China. Cumulatively, they provide a rich source of information as to how financial elites and policymakers in China came to manage the ambiguous relationship between state and market by extending the reach of financial capital, but simultaneously consolidating the persistently illiberal authority of the CCP over the use of that capital.

In addition to the data generated by these interviews, I rely upon a variety of primary and secondary materials as key sources of evidence. These can be divided into three categories. First, economic and financial data collected from collections such as CEIC China Economic Premium and the China Statistical Yearbook [中国统计年鉴] (economic data at national, provincial, and city level) and the Almanac of China’s Finance and Banking [中国金融年鉴] (financial sector data). Regulations, policies, and decrees are found in sources such as A Collection of Financial Regulations and Systems [金融规章制度选编]. Second, the research is strengthened by consulting Chinese secondary literature as well as media coverage of financial reform. This secondary literature includes a number of internal government journals including Financial Reference [金融参考], Financial Statistics and Analysis [金融统计与分析], Financial Research Report [金融研究报告], Internal Reference of Reform [改革内参], and Leader’s Policy-Making Information [领导决策信息]. Finally the book also draws upon academic journal articles and monographs written by financial elites and policymakers, including records of key thinkers and decision-makers such as Wu Jinglian 吴敬琏, Xue Muqiao 薛暮桥, Chen Jinhua 陈锦华, Zhu Rongji 朱镕基, Dai Xianglong 戴相龙, and Zhou Xiaochuan周小川. These records significantly assist us in tracing the path of reform within the financial sector and connecting ideas and discourses to policies and outcomes.

The book unfolds over seven chapters. Chapter 2 positions the current study of China’s evolving capitalism in the broader context of China’s historical politico-economic evolution, and the significance of a distinction between a market economy and a capitalist economy for the study of contemporary political economy. Underlying the current debate as to the nature of China’s state capitalism both in a comparative and a global context remains the challenge of better understanding the role of socio-political authority in underpinning different modes of economic development. I reassess the concept of rational action and argue that the Eurocentrism that has dominated debates as to why China ‘failed’ to develop capitalism is the same Eurocentrism that has reified the conceptual state and market as the definitive analytic categories of Western political economy. This connects with the concerns outlined above as to the difficulties of reconciling China’s contemporary economic transformation with the fact that its political system remains firmly rooted in what some still view as the pre-modern, as well as retaining lineages of a decidedly modern socialist era. Thus, it is only by way of understanding contemporary capitalism as more than the various configurations of state and market institutions – as the broad literature surrounding varieties of capitalism would reduce it to – that we can begin to make sense of China’s otherwise highly paradoxical path of development. More specifically, it opens up the theoretical space for conceptualizing the role of the CCP as an integral element of this evolving capitalist enterprise.

Chapter 3 develops an analytic framework for understanding how the financial system underpins a particular path of politico-economic development. First it examines how the concept of uncertainty and its relationship to financial risk is fundamental to making socio-economic action possible, a process with both economic and political implications. The management of uncertainty not only generates the potential for economic growth, but also contains the mechanisms for structuring that growth in particular ways. The chapter thus embeds the role of the CCP in sociocultural and historical context, reconceptualizing it as the key locus of authority around which this management and exploitation of uncertainty takes place in Chinese capitalism.

Chapters 4 to 6 trace the role of the financial sector in China’s broader strategy and path of economic growth and development between 1990 and 2012. Chapter 4 focuses on the period 1990–97. The politico-economic retrenchment following the social protest movement and events in Tiananmen Square that unfolded in June 1989 would lay the basis for economic revitalization, but along lines very different from a liberal free-market ideal. The chapter examines this legacy of neoconservative ascendancy in the aftermath of 1989, combined with Deng Xiaoping’s successful reassertion of economic growth and development as the foremost economic, political, and social priority. Together, these laid the basis for a path of reform that combined an effort to increase the commercial effectiveness and rationality of the financial system with the reconsolidation of centralized political authority, and an upgrading of the political and ideological cohesion of the most significant and critical sectors of the political economy at the time; the banks and the state-owned industrial firms. In doing so, the financial foundations were laid for two decades of stable, rapid, yet unsustainable growth.

Chapter 5 examines the process of financial reform and restructuring following the 1997 Asian financial crisis, during the process of accession to the World Trade Organization (WTO), and through to the unfolding of the 2008 financial crisis. As China transitioned from what had been a position of (relative) international isolation to (partial) integration with the global economy, it was necessary to develop a set of financial and macroeconomic policies that would support trade and attract investment. China’s leaders therefore sought to construct an internationally oriented modern financial system, which for all appearances was now increasingly geared for competition with foreign banks both at home and eventually abroad. Yet the premise of reform during the 2000s was not to replicate a Western financial system, but to transform the banking system into a more effective tool for achieving the broader politico-economic goals of the CCP. Reform was intensified, not in order to create more independent market forces, but rather to improve the market as a tool for the CCP.

Chapter 6 traces how the 2008–09 financial crisis precipitated further steps towards developing technocratic and rationalized financial regulatory institutions under the auspices of continued overarching CCP authority. The Chinese financial system was faced with the immediate economic imperatives of supporting growth and the discursive discrediting of an Anglo-American regulatory model. These combined in a crisis response that directly tied financial institutions ever closer to the heart of the Chinese political economy rather than seeking to insulate the real economy and public finances from the private financial sector, and the emergence of a shadow banking system that both supported and posed risks to financial stability. At the same time, shadow banking gave rise to new technology-driven financial institutions and channels of credit intermediation, which are now increasingly being brought under CCP control and authority, further deepening the conjoined processes of market development and political consolidation. Counterintuitively, the very forces behind deeper and broader financial liberalization are now also consolidating the CCP’s overall legitimacy and ruling capacity.

The concluding chapter considers why, in the study of the intertwined processes of evolution in the global order and China’s ongoing socio-economic transformation, it is both useful and necessary to study the role of the financial system in China’s economic development, and in turn to study the role of the CCP in China’s financial system. It points to some of the ways in which the arguments developed in the book are important to future research into the reshaping of China’s political economy and the global political economy in the aftermath of the 2008 financial crisis. Finally, it draws out some of the book’s implications for the conceptual, theoretical, and methodological ways in which we approach the ‘China question’ and the future of authoritarian capitalism in an era of flux and change in the global capitalist order.

Notes

1See further Hu et al. (2012).

2Interview 28 November 2012, Beijing – China Investment Corporation.

3This interpenetration of the political and the economic is addressed admirably by Greta Krippner, who details how ‘financialization’ in the United States offered a ‘solution’ to the socio-political crises of the 1970s. Likewise, I seek to understand how a particular mode of economic growth ‘solved’ the socio-political dilemmas faced by the CCP. Further, and in contrast to a Marxist world-systems theoretical perspective, we both seek to ‘scale back the analysis to more manageable proportions where precise mechanisms and specific social actors are more visible’ (Krippner 2011, 15).

4This is apparent even amongst the most notionally ‘private’ of the joint-stock commercial banks, such as Minsheng Bank (Stent 2017).

5Often referred to as the nomenklatura, having been modelled upon the Soviet methods of Party control over the bureaucracy. Within the 5000-strong core list there exists a more select 1000-strong ‘elite within the elite’ list known as the Central Cadres List [中央干部目录], as well as a longer list of 39,000 official positions whose appointment must be reported to the Central Committee [向中央备案的干部职务名单].

6As Hamrin and Zhao (1995, xxxvii) have described it, ‘Economic units are afraid of the [NDRC] and all units fear the Organization Department’.

7Interview, 6 June 2012, Beijing – Ministry of Finance.

8The 1990 position-list was published on 10 May 1990, particularly as one of the measures to reassert party discipline in the aftermath of 4 June 1989.

9Interview, 15 April 2014, Beijing – China Banking Regulatory Commission.

10Interview, 9 August 2013, Beijing – China Construction Bank.

11Giving rise to such concepts such as a ‘partial reform equilibrium’ (Hellman 1998) that have underscored studies discussed above such as those by Huang, Shih, and Walter and Howie.

12These perspectives rely upon the McKinnon-Shaw Hypothesis, which holds that common instances of government intervention in the financial sector, such as interest rate control and directed credit, generated financial repression that constituted a fundamental obstacle to economic growth in developing countries (Li Kui-Wai 1994; Lardy 1998; Xu 1998).

13This derives from the traditional characterization of China’s ‘paramount leader’ as the core of the CCP, willing to enter into discussions with others, but ultimately wielding the prerogative of final, and sometimes arbitrary, decision-making power. Xi Jinping’s entrenchment at the heart of power in Zhongnanhai reveals the enduring importance of centralized authority in Chinese politics and society, and thus economy.

14As Walter and Howie (2011, 25) state, ‘with all aspects of banking under the Party’s control, risk is thought to be manageable’.

15Zheng (2010) points towards the rootedness in Chinese culture of the CCP’s functional characteristics.

16A similar argument is made by Arif Dirlik (1989) with respect to the dialectical interplay of ideology and organization in the formation of the CCP’s formation in 1921, following the Russian Revolution of 1917 and the May Fourth Movement of 1919.