Socialism or Capitalism? New Turning Point in China

The National People’s Congress closed last week in Beijing after ratifying the 11th Five-Year Plan—the first one since 1980 that openly retreats from growth-above-all as the organizing principle of national economic policy. Premier Wen Jiabao presented it to the 3,000-odd delegates and the language was striking. “Scientific development.” “Harmonious society.” Social equity cited alongside GDP targets for the first time in living memory. Whether this is a genuine shift or the most sophisticated political communication exercise the party has managed in years is the question everyone in Beijing is arguing about right now.

The numbers that motivated the plan are real enough. The rural-urban income gap has widened to roughly 3.2 to 1 by official measure—some researchers think 4 to 1 is closer to the truth once you account for urban in-kind benefits like subsidized housing and health care. China’s Gini coefficient crossed 0.45 sometime in the last two years, depending on whose data you use, which puts inequality at levels historically associated with social instability in developing countries. The party statisticians know this. The party leadership also knows that mass rural incidents—protests, riots, land seizures—ran to somewhere between 74,000 and 87,000 events in 2005 according to the Ministry of Public Security’s own count.

Hu Jintao introduced “harmonious society” formally at the 6th Plenum of the 16th Central Committee last October, but the NPC ratification this month is the first time the concept has legal and programmatic weight. What it means in practice is contested. The plan sets targets for reducing energy consumption per unit of GDP by 20% over five years, extending the New Cooperative Medical Scheme to all rural counties, and restraining the growth of fixed-asset investment which has been running at over 25% annually.

This is where the Chinese economics profession has gotten interesting. Liu Guoguang, a former vice-president of the Chinese Academy of Social Sciences and one of the architects of the 1980s reform consensus, published an extraordinary essay this year warning that market reforms had gone too far and that Marxist political economy needed to reassert itself in the curriculum. He is eighty years old and carries the prestige of the founding generation. Younger economists like Qin Hui at Tsinghua counter that the problem is not too much market but a specifically distorted market—one where land can be seized by local governments, where state enterprises borrow at subsidized rates and compete against private firms, where the rule of law is still subordinate to party preference. On this reading, “harmonious society” risks becoming a justification for slowing the institutional reforms that would actually reduce inequality.

The foreign investment community in Shanghai and Guangzhou is reading the plan differently. The worry is not socialism but confusion—a plan that tells local officials to slow growth and extend social services simultaneously, without a clear revenue mechanism. China’s fiscal federalism remains fragmented; local governments depend heavily on land sales and extrabudgetary fees. If they are told to provide health care while land-sale revenue is constrained, something gives. The history of unfunded mandates in China is not encouraging.

There is a structural story running underneath all of this that does not get enough attention. The rebalancing from investment to consumption that the plan nominally targets requires that Chinese households start spending the savings they have been accumulating partly as precautionary insurance against health and education costs. Whether reducing those costs through expanded social programs actually translates into consumption spending depends on whether people believe the programs are reliable. Trust in public institutions in rural China is not high after a decade of local corruption and fee extraction.

The 10.2% growth figure for 2005, revised upward by NBS in December, gives the leadership headroom to do this without panic. For context on what that number actually measures and what it conceals, our post on Beijing’s GDP release methodology is useful background. The Pearl River Delta story complicates the rural-urban narrative in interesting ways—the factory-floor economy of Guangdong is itself a creature of rural migration that the harmonious-society rhetoric has to somehow absorb. And the question of whether Hu and Wen are managing a genuine social compact or something closer to useful political theater connects to the longer argument we made in the fake-threat framing of China’s rise—which is to say, the habit of misreading what China’s government actually does versus what it says.