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Capitalism with Chinese Characteristics

Yasheng Huang, Cambridge University Press, 2008, 348 pages, £15.99.

How does China really work? Yasheng Huang’s perhaps surprising answer in this important book is reassuring for those with battered faith in free-market capitalism. China’s economy has grown best in the last thirty years when policymakers have promoted private enterprise and market liberalization, less well when the heavy hand of the state has reasserted itself. This is a timely point to make with the Chinese leadership seeming now to favour a retrenchment of the command economy in the wake of the global financial crisis. And with his findings based on deep research into the workings of Chinese companies and institutions, it’s one Huang makes with conviction.

One of the book’s main themes is to challenge the simplistic idea that China’s growth since the reform and opening era began in the late 1970s has been both consistent and consistently good for the country. Instead, he draws a strong contrast between the policies of the 1980s and 1990s. In the former decade, Huang argues, the government allowed private entrepreneurship to flourish, most particularly in the rural sector where the latent business instincts of Chinese peasants were given a freer rein. In the 1990s, by contrast, the government kept up the pace of growth through centrally controlled investment in urban areas: impressive to outsiders visiting cities like Shanghai and marvelling at the changing skyline, but not nearly as positive in terms of improving living standards for most of China’s population. Huang argues the retrograde policies of Jiang Zemin and his cohorts in this decade did more harm than good for Chinese society, with spending that could have gone on improvements to health and education largely wasted. In effect, for Huang the 1990s were as much of a lost decade in China as they were in Japan.

One of the foundations of Huang’s argument is a close analysis of the TVE phenomenon – the growth of town and village enterprises in the 1980s. He draws a contrast between the view of western commentators that ownership of the TVEs was important, and the Chinese perspective that their defining characteristic was their location in the towns and villages. This, Huang argues, gets over the – to Western eyes – puzzling anomaly that collectively owned businesses should be less efficient. By paying close attention to primary sources, Huang concludes that there is no contradiction with free-market theory: in fact, the TVEs were for the most part private in nature, and this contributed to their success in helping to create the vibrant Chinese economy of the 1980s, which in turn helped to lift millions out of the poverty caused by the failed Mao years.

Huang isn’t dogmatic enough to describe 1980s China as some form of free-market utopia, arguing instead that the policies of the decade were ‘directionally liberal’. By contrast he sees in the post-Tiananmen years not just a political crackdown, but a reversal of the gradualist economic reform of the previous decade. The TVEs began to languish as policy became less favourable and as more reliance was placed again on large state-owned enterprises, while investment as a percentage of GDP began to rise steadily. Huang produces statistics to argue this reversal of policy was bad for productivity, and had a detrimental effect on how quickly poverty in China abated. He focuses one chapter on Shanghai as an exemplar of where China went wrong in the 1990s, suppressing entrepreneurial-led growth in favour of white-elephant public projects that have offered little to the broad-based population.

Instinctively, Huang’s line of thought is attractive. Certainly the scale of the research is impressive, and goes beyond most western commentators other than those with high-level Chinese language skills and access to the primary sources. Still, while the book is written accessibly enough, it is not an easy read, occasionally becoming bogged down in minute statistical detail. The sheer weight of Huang’s investigative efforts is clearly born of a deep frustration with foreign economists whom he believes have researched China less thoroughly: Joseph Stiglitz and the World Bank are among those with whom Huang is particularly annoyed, and this sometimes shows through unattractively. Stylistically, the book can be frustrating too, with Huang spending rather too many words explaining what he is going to write about in the coming passage or chapter, rather than simply getting on with the argument. And while it is hard to challenge Huang’s line of thinking given the overwhelming weight of his research, there is a nagging sense that his account of China’s growth is rather too easily divided between the 1980s and 1990s, ignoring the serious challenges policymakers faced such as intermittent high inflation or the Asian financial crisis, while glossing over achievements such as entry to the World Trade Organization.

Nonetheless, the book is overall an important reminder that the story of China’s growth rewards detailed research and is not simply the tale of a gradual deepening of market-led economic reform. That’s an important lesson to bear in mind as China responds to the financial crisis, the danger being that it will use its resources to prop up inefficient state-owned enterprises while small and medium-sized businesses find credit hard to come by, with investment spending to sustain growth at the magic 8% level risking worsening China’s overcapacity problem. Huang’s tale of the first two decade of China’s economic reform is indeed worth bearing in mind when watching the latest developments.

Andrew Peaple

Beijing-based columnist with the Wall Street Journal’s Heard on the Street column

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