CSR 2019: Sino-Capitalism: Demystifying the Paradox of China’s Hybrid Political Economy in Transition

By Zhou Shangsi

Is authoritarianism inherently incompatible with, or does it only provide barren soil for, the seeding of a capitalist market economy? Political economists have long debated the feasibility of symbiosis between two seemingly contradictory forces, i.e., market and state, in facilitating economic development. Conventional analysis supports the views that democracy, rather than authoritarianism, provides more fertile ground for fostering a capitalist economy and growth.[i] However, the rise of China, an authoritarian party-state embracing the ideas of marketization and globalization, seems to empirically challenge the conventional wisdom, which claims capitalism can only flourish in liberal democracies.

Despite the ongoing controversy about the sustainability of the Chinese authoritarian capitalism model, there is no doubt that the realization of China’s phenomenal catch-up success should be credited to its idiosyncratic innovation of a dual-functioning political-economic structure.[ii] The unique “Sino-capitalist” model,[iii] or as others have termed it, the model of “directed improvisation,”[iv] “structured uncertainty,” [v]or “experimentation under hierarchy,”[vi]  creates a middle ground between central planning and a laissez-faire approach. It enables China to harness both state capacity and market forces by combining top-down bureaucratic leadership with bottom-up experimentation with local agents and markets.[vii] Therefore, based on the existing literature on Chinese political economy, this commentary argues that the institutional innovation of an adaptive dual-track political-economic system, which safeguards both the state and the market, is the key to understanding how China can overcome the contradictions and develop synergies between political guidance and market competition. [viii] This essay will draw upon the examples of institutional innovations in business sector development (consisting of state-owned enterprises and private enterprises), foreign investment and trade liberalization, and domestic industrial upgrading in the global production system. As each case shows, Chinese institutional innovation has been a careful compromise between the pre-existing institutional legacies, i.e., China’s socialist authoritarian system, and the subsequent modification or creation of novel institutions to promote a market economy.

The development of China’s business sector has been marked by a series of policy innovations for the advancement of state-market coevolution. A peculiar feature of the business sector in China has been the vacillations between power centralization and further relaxation of the party-state’s control over the economy. As stated by Heilman,[ix] Naughton and Tsai,[x] and Chen,[xi] the reform of state-owned enterprises in China remains one of the most challenging tasks because of the vested political interests in this reform and its stake in regime stability. Nevertheless, this top-down gradualist reform approach does not preclude policy experimentations that work for the realization of both useful central guidance and marketization. The policy of “grasping the large and letting go of the small” ( 抓大放小, zhuada fang xiao) in the mid-1990s and the creation the State-owned Assets Supervision and Administration Commission (SASAC) in early 2000 are cases in point. Compared with China’s past  under the central planning system and its Asian democratic counterparts, these two reform initiatives improved the competitiveness of large SOEs with the purpose of creating industrial champions as a means of defending national interests; they also increased market competitiveness by relinquishing the state’s direct control over smaller SOEs.

However, relaxation of the state’s direct control over privatized SOEs and the booming private sector in China does not equate with weakened party-state guidance over the increasingly complex economy. Instead, China’s government has been able to adapt to this relative decentralization by embedding itself in the changing socio-economic structures during business sector reforms.[xii] In China’s private business sector, co-optation in the form of the recruitment of private entrepreneurs into the party system –”wearing red hats” – can be viewed as an institutional innovation that helps construct a mutually beneficial relationship between the Chinese Communist Party (CCP) and private entrepreneurs. For the CCP rulers, recruiting entrepreneurs into the CCP enables them to appease political dissidents and to consolidate state-business connections in China. This connection helps maintain, albeit indirectly, the dominance of the CCP over the regime and enables the rulers to share the material rent generated by the private sector.[xiii] On the other hand, private entrepreneurs are also motivated to join the CCP since it helps establish good political connections (关系, guanxi) that are important when doing business in China; it also helps business elites advance their political careers, knowing Party membership acts as a political career entry ticket in China.[xiv] In the end, corporate governance over both the state-owned enterprises and private enterprises in China has been driven by institutional innovation that takes into account the duality of the state and the market that is specific to the Chinese context.

Second, regarding foreign economic relations, China has successfully integrated into the global economy through foreign investment and international trade by formulating an innovative dual-track system, harnessing both the forces of the state as well as the market. The key enabling factor for China’s transformation into the world’s workshop and source of outward investment relies on policy experimentation under the overarching guidance of the central government, which stimulates the reception and internalization of international capital while maintaining the smooth channeling of policy information from the top. The development of Special Economic Zones (SEZs), beginning in the 1980s, could be viewed as another case of China’s adaptive institutional experimentation. As indicated by the name, SEZs refer to a limited number of designated pilot regions that adopt more favorable and liberalized economic policies than found in other parts of the country. A critical objective of SEZs is to expand foreign trade and investment, and more implicitly to introduce and internalize foreign capital, resources, and technical know-how from abroad without overthrowing the overarching state supervision.[xv] The unique policy cycle in the governance of investment and trade enables the state to conjoin its guidance from above and secure competitive market forces from below, and the economic rent generated from the significant enhancement of China’s global competitiveness through guided liberalization, in turn, sustains the resilience of authoritarianism in China.[xvi]

Accordingly, the final point concerns the creative way that China manages to deal with the competing forces of the state and market in domestic technological development, which enables it to move up the global value chain from low-end labor-intensive industries to high-end capital-intensive industries through manufacturing-centered upgrading.[xvii]According to Breznitz and Murphree[xviii] and Chen,[xix] economic growth and industrial innovation in China rely on the invention of a hybrid institutional network that, on the one hand, creates enough space and leeway for local innovation. On the other hand, it preserves a significant amount of steering and overseeing capacities from above so as to mitigate the cost of market failure during the innovation process. In other words, domestic industrial upgrading in China is another result of the experimentation with a hybrid institutional framework, driven by a combination of trial and error by local agents and final guidance in decision-making at the top.

This commentary reviews the development trajectories of China’s business sector, its investment and trade liberalization, and its industrial upgrading faced with external competition from the global market. As each case shows, the reason China can reconcile the competing forces of the state and market is attributed to its institutional innovation of an adaptive dual-track political-economic system preserving the interactions between the state and the market. This idiosyncratic institutional innovation is established to balance between the country’s socialist institutional legacies and its need for economic development, by incorporating entrepreneurial forces at the local level.[xx] The sustainability of this “Sino-capitalism” model remains hard to predict considering the incompleteness of China’s market transition, but the invention of this innovative political-economic model provides an institutional explanation for the Chinese economic miracle through the past forty years of reform and opening-up.


[i] For example, see: Seymour Martin Lipset, “Some Social Requisites of Democracy: Economic Development and Political Legitimacy,” American Political Science Review 53, no.1 (1959): 69-105; Adam Smith and Edwin Cannan, The Wealth of Nations (New York, N.Y: Bantam Classic, 2003); William J. Baumol, Robert E. Litan, and Carl J. Schramm, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (Yale University Press, 2007); Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Routledge, 2010).

[ii] Sebastian Heilmann, “Policy Experimentation in China’s Economic Rise,” Studies in Comparative International Development 43, no. 1 (December 27, 2007): 1–26; Kellee Tsai, Capitalism without Democracy: The Private Sector in Contemporary China (Ithaca, N.Y: Cornell University Press, 2007); Dan Breznitz and Michael Murphree, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China (New Haven: Yale University Press, 2011); Yuen Yuen Ang, How China Escaped the Poverty Trap (Ithaca, N.Y.: Cornell University Press, 2016); Christopher McNally, “Sino-Capitalism: China’s Reemergence and the International Political Economy,” World Politics 64, no. 4 (2012): 741-776.

[iii] McNally, “Sino-Capitalism: China’s Reemergence and the International Political Economy,” 741-776.

[iv] Ang, How China Escaped the Poverty Trap.

[v] Breznitz and Murphree, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China.

[vi] Sebastian Heilmann, “Policy Experimentation in China’s Economic Rise.”

[vii] McNally, “Sino-Capitalism: China’s Reemergence and the International Political Economy,” 741-776.

[viii] Barry Naughton and Kellee S. Tsai, “Introduction,” in State Capitalism, Institutional Adaptation, and the Chinese Miracle, eds. Barry Naughton and Kellee S. Tsai(New York, NY: Cambridge University Press, 2015), 1-24.

[ix] Sebastian Heilmann, “Policy Experimentation in China’s Economic Rise.”

[x] Naughton and Tsai, State Capitalism, Institutional Adaptation, and the Chinese Miracle.

[xi] Ling Chen, “Playing the Market Reform Card: The Changing Patterns of Political Struggle in China’s Electric Power Sector,” The China Journal, no. 64 (July 1, 2010): 69–95.

[xii] Naughton and Tsai, State Capitalism, Institutional Adaptation, and the Chinese Miracle; Ang, How China Escaped the Poverty Trap; McNally, “Sino-Capitalism: China’s Reemergence and the International Political Economy.”

[xiii] Tsai, Capitalism without Democracy: The Private Sector in Contemporary China; Bruce J. Dickson, Wealth into Power: The Communist Party’s Embrace of China’s Private Sector (Cambridge, New York: Cambridge University Press, 2008); Nicholas R. Lardy, Markets over Mao: The Rise of Private Business in China (New York: Columbia University Press, 2014).

[xiv] Bruce J. Dickson, Wealth into Power: The Communist Party’s Embrace of China’s Private Sector.

[xv] Heilmann, “Policy Experimentation in China’s Economic Rise.”

[xvi] Mary Gallagher, “Reform and Openness: Why China’s Economic Reforms have Delayed Democracy,” World Politics 54, no. 3 (April 2002): 338-372.

[xvii] Edward Steinfeld, Playing Our Game: Why China’s Rise Doesn’t Threaten the West (New York; Oxford: Oxford University Press, 2012).

[xviii] Breznitz and Murphree, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China.

[xix] Ling Chen, “The Microfoundation of State Intervention and Policy Effectiveness,” in Manipulating Globalization: The Influence of Bureaucrats on Business in China, (Stanford: Stanford University Press, 2018), 93-130.

[xx] Naughton and Tsai, State Capitalism, Institutional Adaptation, and the Chinese Miracle.


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