Until the late 1970s, China did not even keep official statistics on private enterprises because they were illegal and negligible in number. Today there are over 29 million private businesses, which employ over 200 million people and generate two-thirds of China’s industrial output. The private sector’s spectacular growth has led many observers to speculate that China is developing a capitalist class that will overthrow the Chinese Communist Party and demand democracy based on the principle of “no taxation without representation.”
Inspired by the experience of a handful of Western countries, this expectation is based on a two misguided assumptions: first, that private entrepreneurs comprise a single, consistent class; and second, that these entrepreneurs would support a regime change. Although China’s capitalists are not poised to demand democracy, they have had a structural impact on Chinese politics. In order to run their businesses in a transitional and a politically charged regulatory environment, private entrepreneurs have created a host of adaptive strategies at the grass-roots level. The popularity and relative success of these strategies have, in turn, enabled reform-oriented elites to justify significant changes in the country’s most important governing institutions.
Entrepreneurs Divided
China’s private entrepreneurs should not be regarded as a coherent “class” that shares similar identities and interests. Business owners come from all walks of life, and as such, they bring different resources to bear when they have operational or policy grievances. The private sector now includes people as varied as laid-off state workers running street stalls, factory owners producing exports for the global marketplace and rags-to-riches capitalists on the Forbes annual list of China’s wealthiest individuals. The sociopolitical composition of private entrepreneurs is further complicated by the emergence of “privatized” (technically “corporatized”) state-owned enterprises, frequently operated by their former managers. The proprietors of newly privatized state entities are much more likely than regular private entrepreneurs—who have built up their businesses de novo—to be local elites with well-established social and political networks.
At the same time, China’s capitalists face different operating realities at the local level. Observers who focus on aggregate statistics showing private-sector growth tend to overlook the significant variation in local political and economic conditions. Governments in areas that opened to foreign capital earlier on in the reform era, for example, have discriminated against local private businesses by offering foreign investors favorable tax rates and privileged access to bank loans and land use. It has similarly been more difficult for private businesses to thrive in localities that inherited a large state-owned industrial base as local officials have been too preoccupied with the challenges of subsidizing local factories and maintaining social stability to address entrepreneurship.
Then there are areas such as Wenzhou in Zhejiang province where the local government looked the other way as private entrepreneurs engaged in capitalist practices before it was officially sanctioned and even collaborated with local entrepreneurs to allow vibrant underground financial markets to flourish. Given the vast differences among local governments in their orientation towards the private sector, it is overly simplistic to assume China’s private entrepreneurs face similar business conditions and concerns.
One might counter that the predictive logic of capitalists pushing for democracy is only meant to apply to the highest economic tier of business owners, i.e., that we would only expect the most successful entrepreneurs (not street vendors) to have both the ability and the means to agitate for political change. However, even if we set aside small retail vendors, the fact is that the wealthiest capitalists remain divided by region, sector and most significantly, by their previous backgrounds. A prerequisite of class formation is class identity, and a prerequisite of class identity is a sense of shared values and interests. Real-estate tycoons born out of party-state patronage have little in common with the owners of manufacturing conglomerates who still remember what it was like to grow up hungry in mountainous areas with little arable land. Social and political identity in China is defined by more than ownership of private assets and net worth.
Further evidence of private entrepreneurs’ limited desire for democracy can be seen in their nonconfrontational modes of dispute resolution. When private entrepreneurs are disgruntled with policy issues, they are much more likely to use informal channels for solving their problems than the legal system or political participation. Based on a national survey of private entrepreneurs and extensive fieldwork in 10 provinces, I found that only 5% of business owners regularly rely on more assertive modes of dispute resolution—such as “appealing to the local government or higher authorities” or “appealing through judicial courts.” Moreover, among the entrepreneurs who believe that there is a need to strengthen rule of law in China, few associate legal reform with democratization. Instead of aspiring for a more liberal political system, most entrepreneurs fear that democratic reforms would lead to instability, which would jeopardize the prospects for continued economic growth.
Indirect Political Influence
Although china’s capitalists have not politically organized themselves, the business environment for private firms and their owners has improved dramatically since the late 1970s. After the political crisis of 1989, capitalists were banned from joining the Communist Party and there were a few years of uncertainty about whether economic reforms would continue. But the fact is, once unthinkable changes have occurred in both party rhetoric and official governmental regulations. Capitalists are now encouraged to join the Communist Party and the constitution of the People’s Republic of China now protects private property rights (at least in principle). In fact, according to official surveys, 33.9% of private entrepreneurs are now members of the CCP, and conversely, 2.86 million or 4% of party members work in the private sector. Yet the really remarkable part about these changes is that private entrepreneurs themselves never lobbied the state or party directly for these macro level changes. Instead, Beijing has been surprisingly responsive to the adaptive, informal strategies created by entrepreneurs to get things done in the context of a transitional socialist economy.
For example, before 1988 it was illegal for “individual businesses” to hire more than eight employees because Marx’s Das Kapital indicated that businesses with more than eight employees were “exploitative capitalist producers.” Private entrepreneurs found a way of getting around this restriction by simply registering their businesses as “collective enterprises.” This adaptive strategy became commonly known as “wearing a red hat.” By the time private enterprises with more than eight employees were permitted to operate, there were already over 500,000 red-hat enterprises. In effect, the center sanctioned, post hoc, what was already going on.
A similar dynamic occurred with the Communist Party’s incorporation of private entrepreneurs. Wearing a red hat enabled party members to become red capitalists, which changed the occupational composition of the party from within. As employees of the state began running their own businesses, albeit disguised as collective ventures, the party’s ban on private entrepreneurs became increasingly unrealistic, if not anachronistic. By the early 2000s, the spread of red capitalists presented the party with the critical dilemma of whether to condemn their economic activities or embrace them: 19.8% of entrepreneurs surveyed by official entities in 2000 indicated that they were already CCP members.
After consulting with provincial and subprovincial officials throughout the country, the party’s core leadership decided that it was in the interest of economic growth, as well as party rejuvenation and survival, to legitimize the existing red capitalists and co-opt other private entrepreneurs. Within a relatively short period of time, the party line shifted from banning capitalists to welcoming them. Such a policy reversal would have been difficult to justify in the absence of pre-existing grass-roots deviations from the party line.
Private sector development has clearly had a structural effect on Chinese politics, but not in the manner expected. Economic growth during the reform era has been associated with urbanization, higher rates of literacy and the emergence of economic elites. Moreover, China’s political system has become more inclusive and institutionalized. But the people driving the country’s growth, private entrepreneurs, never mobilized as a class to pressure the regime for these changes, and it is unlikely that they would do so in the future. Instead, in the interest of staying in power, China’s leaders have proven to be remarkably responsive, if not overtly attentive, to the unarticulated needs and interests of private capital. Neither capitalists nor communists are interested in disrupting the implicit pact that has emerged in the last two decades: continued growth for continued communism.
Kellee Tsai is a professor of political science at Johns Hopkins University and author of Capitalism without Democracy: The Private Sector in Contemporary China (Cornell University Press, 2007).
