China’s long march to capitalism – Part Two

[Note: The original draft of this document was written in April 2006 and was then discussed and voted at the July 2006 World Congress of the IMT]

Deng's 1978 turn

It was this consideration that led the Chinese Communist Party in the late 1970s to draw the conclusion that it was necessary to open up to foreign investment. In December 1978 the Chinese Communist Party held its Third Plenum. Here it discussed the new turn. Although it stated that centralised planning would remain the dominant form, it introduced elements of decentralisation and encouraged the setting up of private firms. The idea was that market forces would have to be introduced as a means of making sure the needs of the economy were met.

This eventually led Deng to suggesting the setting up of four special economic zones in 1979 around Hong Kong and Macao, in the Guangdong and Fujian provinces on the southern coast. These were zones that would be open to foreign investment. Initially there were quite tight restrictions in the levels and kind of investment that could be made by foreign capitalists. This indicates what we said above, that even the Deng wing saw these measures as a means of modernising the productive forces, while maintaining the centrally planned and state-controlled nature of the economy. At first they were very cautious and made only limited concessions.

However, precisely because of the restrictions, the four special zones were not immediately as successful as had been expected. That is why in 1983 these restrictions were lifted and, for instance, wholly foreign owned companies were then allowed to operate. Here we see the empiricism of the bureaucracy. There was not a worked out "plan". But once the bureaucracy embarked on this road it started to develop a logic of its own. The bureaucracy found it more and more difficult to dictate to the market forces. If they wanted the capitalists to invest they had to create favourable conditions for them.

While these special zones were being created a parallel process was taking place in agriculture. The old collectivised land system was dismantled and the logic of private production was introduced. This was done by "leasing" the land out to families. Legally the land remained state property - and does so to this day - but in practice it had become like private property. For instance the leased land can be passed on to one's offspring. This change led to a situation where already by the end of the 1980s those who had leased the land could even sell the lease or leave it as an inheritance.

This led to a differentiation within the peasantry, with some enriching themselves while others lost the source of their livelihood and were forced to start migrating to the cities. There was an increased productivity of the land on the one hand and an impoverishment of large layers on the other. This provided the inflow of cheap labour that would serve as a basis for the development of capitalism in the cities.

This is a process similar to what took place in Russia after 1861 with the dissolution of the Mir, the old agricultural commune. As the communes broke down the peasants began to move into the cities, providing the labour necessary for the development of capitalism between 1880 and 1912. But what is happening in China today is on a much bigger scale than what we saw in Russia. It can also be compared to the process in the early days of British capitalism, with the brutal expulsion of the peasants from the land, forced to go and live in the cities in atrocious conditions. It could even be compared to the period of the Wild West in the expansion of capitalism in the USA. What we are seeing in China has in fact elements of all these historical examples. It is unprecedented both in terms of the scope and the speed of the process.

One of the first measures the Chinese regime introduced in trying to attract foreign investment was the creation of a "labour market". Thus a series of reforms were introduced which allowed the managers of selected state-owned enterprises to end the so-called "lifetime" jobs. The idea that workers could be sacked was introduced.

A few years later, in 1983 the state went a step further. State-owned enterprises could now hire workers on a contract basis for a limited time period. This new system meant that the newly hired workers would not get the welfare benefits that state workers had benefited from in the past. By 1987 7.5 million workers had been hired on a contract basis by the state firms and a further 6 million had had their status changed from lifetime to contract.

In the same period the private sector workforce began to grow. From about a quarter of a million in 1979 it reached 3.4 million by 1984, mainly in very small enterprises. Initially a limit was placed on how many workers could be employed by private firms but in 1987 this was abolished. On top of this a disguised form of private enterprise was allowed to develop, in the form of the so-called "urban collectives" or Town and Village Enterprises (TVEs). These were controlled and dependent on local municipalities, but were "profit-oriented", i.e. operating like capitalist enterprises. (We will deal with the development of the TVEs later.)

In spite of these developments, throughout this period the state sector continued to dominate and guide the overall economic process. In the mid 1980s the state sector still employed about 70% of the urban workforce. However the status of these workers was changing. More and more of them were on limited contracts.

The closing of state controlled companies led to the previously unknown phenomenon of unemployment. Soon after the first "market reforms" were introduced, inflation began to take off, provoking social unrest. Fearing the political consequences of this, the regime in 1981 decided to slow down the process. This was something that would be repeated at each successive crisis throughout the process. But every time, as we will see, the bureaucracy - after an initial slowdown and restabilisation of the situation - decided to move forward and accelerate the process once more. It never took a step backwards.

In 1982 the Party still officially stated that the state sector was dominant. At this time we are still in the realm of the bureaucracy of a deformed workers' state using capitalist methods to develop the economy as a whole. By 1984 however they were moving on again, in the direction of greater freedom for capitalist-type development. More and more emphasis was being laid on private production and the market. The prices of most consumer and agricultural goods were liberalised. From now on the market would be the force that would decide price levels.

The 12^th Congress of the Communist Party held in the same year introduced the idea of a "planned commodity economy". We see the beginnings of the contradiction between the planned economy and capitalism being expressed even in the terminology used by the regime. The area covered by the special economic zones was expanded with the addition of fourteen more cities along the coast. A year later the Pearl River deltas, Min River delta and Yangtze River delta regions were also added. Basically the whole area along China's long coastline was opened up to foreign investment.

The process continued to accelerate in 1986 when new measures were introduced, further facilitating foreign investment: lower taxes, more freedom to hire and fire, and easier access to foreign exchange. As part of this process, they introduced a number of changes: they abolished the egalitarian system of wages, removed life-time jobs, linked wages to productivity, and gave short-term contracts - all very familiar to workers in the West.

At the 13^th national congress of the Party in 1987 further proposals were made to develop an "export-oriented economy". The growth of industrial capacity demanded the import of machinery and other goods. As a consequence, the mid-1980s witnessed sharp rises in China's balance of trade deficit, combined with another explosion of inflationary pressures. In the two years 1988 and 1989 there was an annual inflation rate of 18%. The real purchasing power of working class families was being hit hard.

The social instability that this provoked forced the regime to slow down the process. Under pressure, in late 1988, the regime put a brake on the so-called "reforms" and in an attempt to get inflation under control tightened the money supply. This provoked a new phenomenon for the Chinese economy, a recession in 1989. All this led to growing social unrest and a wave of strikes ensued. It is in this context that we have the protest movement around Tien An Men Square in Beijing.

What did the Tien An Men Square movement represent? Clearly the elements of a political revolution were present in 1989. There is no question of this. Large numbers of students came out onto the streets. The youth sang the Internationale, as if to say to the regime and to world opinion, "Look we are not in favour of capitalism, we are not counter-revolutionaries".

But what had started as a student and youth protest began to spread to the workers. This terrified the regime and convinced the Stalinist wing to crush the movement in blood. Through this brutal clampdown the regime was making sure it kept a tight grip on society. Some may ask when was the key turning point in the process of capitalist restoration. As we are dealing with an overall process that started nearly 30 years ago it is not possible to fix such a point. But there have been events which have contributed to accelerating the process. Thus it would be more correct to talk of a series of turning points and one such point is Tien An Men.

After the crushing of the Tien An Men protests the pendulum swung to the right. The movement around Tien An Men Square raised the hopes of many workers and youth, but the masses were defeated. After Tien An Men the regime sought out all the key leaders many of whom disappeared or spent many years in prison. At the same time the bureaucracy temporarily slowed down the process of market reform in an attempt to restabilise the situation. Once it felt sure of itself again the movement in the direction of capitalism intensified.

In the meantime we have to remember what was happening in Eastern Europe and the Soviet Union. In 1989 all the former Stalinist regimes of Eastern Europe collapsed one after another. The bureaucracy lost control of the situation and a chaotic transition to capitalism opened up. The Soviet Union resisted a little longer, but it too eventually succumbed to the same process, with the old Stalinist regime collapsing in 1991. As we have already pointed out, these regimes were so rotten that they fell without hardly any resistance on the part of the bureaucracy. In Russia where the prospect of civil war was a real one, the hard-line Stalinists proved so corrupt that they could not put up any serious opposition. The system they represented had reached its limits.

These events undoubtedly had an impact on the Chinese Stalinists. Up until then they had been introducing market reforms, opening up whole areas of China to capitalist investment, but the state-owned sector still remained dominant - and the party's position was that it should remain so. The levers of economic control were still in the hands of the bureaucracy. The process could still have been reversed. The point is that they had no interest in reversing it. As we have already stated, they never took a step backwards. Faced with moments of instability the process was slowed down but never reversed.

1992: "socialist market economy with Chinese characteristics"

The combined effect of the Tien An Men protest and the collapse of Stalinism in Eastern Europe and the Soviet Union had a profound impact on the Chinese bureaucracy. After these events the Communist Party leadership decided to accelerate the process of "market reform". They began to see capitalist restoration as the solution to their own crisis, but they were determined that the process would take place under the firm control of the bureaucracy. In essence this meant that the bureaucracy was preparing the ground to transform itself into a new capitalist class.

The fact that the bureaucracy was moving in this direction did not mean that it would necessarily succeed in completing the process of capitalist restoration. It is one thing to declare an intention; it is another to achieve it. Had there been a serious downturn in the capitalist west on a scale similar to the 1929 Crash things may well have turned out differently. But that did not materialise. The boom in the west was extended due to a series of factors that we have dealt with in other documents. This has only served to pile up new contradictions, preparing an even bigger crisis when it comes. But the Chinese bureaucracy does not understand this. It does not have a Marxist understanding of these processes, but reacts empirically to events. Capitalism was experiencing a boom on a world level while Stalinism was collapsing and that is all that they could see.

The conclusions the bureaucracy had drawn from all these events were made clear in 1992. That year the XIV Party Congress met, and officially abandoned the idea that the state sector should dominate. They announced the plan to set up a so-called "socialist market economy with Chinese characteristics". In the same year Deng launched a new stage in the "reform programme", as they called it. He went on a tour of the special zone of Shenzen and made a famous declaration, "As long as it makes money it is good for China." This was another important turning point within the regime.

Market mechanisms had already been operating for some time in China. What was significant about 1992 was that the Party officially decided to abandon its commitment to maintaining the state-owned enterprises as the dominant sector. They thus decided to shrink the state sector. Up until then what was taking place was the development of the private sector outside the state sector. Now they decided to proceed towards the privatisation of state-owned enterprises. They selected 2500 locally run state-owned enterprises and 100 centrally run companies for this conversion. By 1998 this was complete.

In 1994 they extended the programme and they stated that they would maintain control over the 1000 largest state-owned enterprises while all remaining state firms would be available for leasing or sale into private hands. By the end of the 1990s state-owned enterprises employed 83 million people, but this represented only 12% of total employment and even in the urban areas only one third of employment. We see an enormous change from 1978 when 78% of urban employment was in the state sector.

At the end of the 1990s the contribution of the state-owned companies to GDP had fallen to 38%. In September 1999 at the 4^th Plenum of the 15^th Party Congress they took another step. They called it the "Let go of policy" position, i.e. the state loosening up and renouncing its control. They proceeded to loosen up in medium and small state-owned enterprises. In July 2000, for example, the Beijing City government that covers a large area announced that state and collective ownership would be phased out in all small and medium sized state-owned enterprises within three years. By 2001 state enterprises accounted for only 15% of total manufacturing employment, and less than 10% of employment in domestic trade.

China had survived the crash of the South-East Asian stock exchanges, partly because they still had a certain degree of state control of foreign trade and the currency was non-convertible. These two factors shielded China from the effects of that crisis. It actually emerged strengthened after it and assumed a dominant role within the region. Following on from this in the period roughly from 1998 to 2001 there was a further acceleration of the process. The direction of the process was now very clear. The Communist Party hierarchy had been completely convinced that private firms were more efficient than state-run ones. The only kind of state-owned industries they could imagine were those that existed under the bureaucratic plan, with all the mismanagement that these involved. They could not envisage efficient state-owned industries under workers' control.

Some interesting figures are provided by a document called China's Ownership Transformation, published in 2005, which we quote below. The document was written by Ross Garnaut, Ligang Song, Stoyan Tenev and Yang Yao of the International Finance Corporation, Australian National University, China Centre for Economic Research and Peking University; published by the International Finance Corporation, a branch of the World Bank and available on the internet at www.ifc.org.

The authors stress that privatisation started in earnest in 1992. Referring to 1995 it says, "the state decided to keep between 500 and 1000 large state firms and to allow smaller firms to be leased or sold". It explains that there was a good reason for this because in 1997 the 500 largest state firms ‑ most of them controlled by the central government ‑ held 37% of the state's industrial assets, they provided large revenues for the state and so on.

The document, when referring to the period when they were speeding up the process, explains that "the trend reflected the belief that for an enterprise to be truly transformed it is necessary for the management to own the majority of shares". And in the Chinese tradition the slogan now became "the state retreats and the private sector moves forward". They invented the slogan to get the message across to the masses.

Plenty of figures are provided which outline the process and reveal its accelerating pace. For example, the document explains that, "If this performance typifies that of the rest of the country [referring to a sample of six cities] then privatisation in China has already gone further than in many East European and former Soviet countries."

However, it is not a simple process of just selling everything off. It is not merely a question of looking at the percentages of state and private ownership (although in the last analysis this is a decisive factor). It is not merely how much is in the hands of the state, but also how that sector that remains in the hands of the state is functioning, and with what aim. It is also necessary to look at the overall direction of the process, and this has been inexorably towards capitalism.

However, in the process of capitalist transformation they haven't yet developed a bourgeoisie that is capable of running major corporations on the scale of some of the American and Japanese multinationals, without the help of the state. The state will continue to play a key role for some time, but eventually a powerful bourgeoisie will emerge.

The bureaucracy has been selling off most of the small and medium sized companies and at the same time encouraging the development of private companies that were never in the hands of the state. Now 450 of the top 500 multinationals operate in China. So an important element in the equation is the fact that the private sector has been developing faster than the state sector. And if we look at what remains of the state sector, we see that part of it is being prepared for further privatisation. Large state conglomerates are being broken up into different companies, with the inefficient sectors being closed and the more profitable sectors sold off.

The managers of state-owned companies are busily involved in asset stripping. They have their friends in the private sector, and they let these have the best machines, the best parts and so on, while they let the company go into disrepair and decline. The feeling among these managers is "this factory is going to be privatised sooner or later and I am going to be offered the factory". So the idea is to reduce the company to a state where it is worth the least possible so it can be bought off cheaply. In many towns the local councils decide that the best way to get a company working is to sell it off cheaply to the managers to stop the asset stripping, the idea being that once the mangers become owners they will use the assets to develop the companies as they will reap the profits.

In the process the workers have paid dearly, with the loss of millions of jobs. In the period 1990 to 2000, 30,000,000 state sector jobs were destroyed. A so-called "rust belt" appeared in the traditional industrial areas, such as the North East, the heartland of China's old state plan. Those still with jobs saw all their long held benefits destroyed. Over a period of several years all the gains of the 1949 revolution were gradually whittled away. This involved resistance on the part of the working class, but the bureaucracy pushed on relentlessly.

They introduced the free market in health care, housing, and labour. Even education now has to be paid for. By the early 1990s there were already strong elements of capitalism. In 1992, 40 percent of sales came from the private sector. In 1991 there were 13,000,000 private industrialists with 21,000,000 workers - largely small businesses - but this was just the beginning. In the villages they introduced concessions to the wealthier farmers: the leasing of land and allowing products to be sold on the market, had broken down the collectives and produced a further differentiation between rich and poor peasants. In 1998 there were still 238,000 state controlled enterprises, but by 2003 this figure had gone down to 150,000.

The Town and Village Enterprises (TVEs)

As we have already touched on, another element in the development of capitalism was the growth of the Town and Village Enterprises (TVEs). The TVEs now account for 30% of GDP but their nature is not always clear and they are of a contradictory character. It would have been impossible for the bureaucrats to simply privatise these enterprises without economic and political chaos. Simply to privatise everything in one go would have meant that many enterprises, and indeed many sectors, would have been shut down or gone broke. This would have meant the end of the rule of the CCP.

The introduction of TVEs was therefore merely a transitional step along the road to complete privatisation. It allows the managers and other parasitic sectors of society time to accumulate the necessary capital to assume ownership of these enterprises. This is a perfect example of how the old state-owned enterprises and the state-owned sector now serve the interests of capitalism in China, by nurturing and supporting the nascent bourgeois elements of society until they can assume ownership directly. In some cases the TVEs are municipal companies, in others they are joint ventures with private capitalists. In any case, they all function as capitalist firms and have been gradually falling into the hands of private capitalists.

The TVEs are sometimes included in statistics to show that the majority of the economy is publicly owned, and some even use them to try and claim that it is a form of "socialism". But a closer look reveals a different picture. The number of TVEs grew from 1.5 million in 1987 to 25 million by 1993, employing 123 million workers, but since 1996 their number has been going down as they are fully privatised. Even when they remain state or municipal companies they function like private companies with the management having the right to hire and fire.

According to Hart-Landsberg and Burkett, Studies have shown that "... ‘on average TVE workers can earn basic wages which are lower than the minimum wage and must earn the rest through overtime and piece-rate quota bonuses. Even the basic wage is not guaranteed since the minimum wage is set by local township authorities whose material interests - both institutionally and privately - are tied up in the maximization of profit'. Indeed, TVE ‘competitiveness and profit margins' are largely underwritten by the ‘abundant supply of dirt-cheap rural labor' freed up by the dissolution of the commune system and impoverishment of individual farm families." (China and Socialism - Market Reforms and Class Struggle, page 45)

The fate of the TVEs was tightly linked to the overall processes taking place in the economy. As the private sector became dominant so the TVEs had to adapt to this. As the same authors explain, "Equally devastating for the TVEs, with new opportunities to profit from private production, many managers began illegally transferring TVE assets or products to private enterprises where they could earn greater returns. This asset stripping accelerated in the mid-1990s after the party committed to the privatisation of small state enterprises... Faced with declining profits and deindustrialisation, township and village officials took their cue from state officials and began a rapid sell off of TVEs beginning in 1996." (ibid).

Using the state to build strong Chinese capitalism

The bureaucracy in China does not want to become prey to imperialist domination. And they are not going to allow that to happen. They know that they must maintain a strong Chinese capitalist sector, and they are doing that by building up and actually strengthening some of the state companies. They have huge amounts of capital available. The state banks are being used to pump money into these state corporations.

According to the authors of China's Ownership Transformation, "China has nurtured over 20 giant corporations and conglomerates that have proven competitive in the international market. Some of these companies are laying off tens or hundreds of thousands of employees, not because they are in financial distress, some of them are hugely profitable, but because they wish to position themselves as important international players. As of 2002 the top 12 Chinese transnational corporations, mainly state-owned enterprises, controlled over $30bn of foreign assets and had some 20,000 foreign employees and $33bn in foreign sales."

So although these are state-owned they are being prepared as major Chinese state corporations to compete with the US and the Japanese, etc., on a capitalist basis. The document provides a table called The Composition Of China's GDP By Ownership Types. We see that already in 1988 the state controlled sector was down to 41% of GDP. By 2003 it had gone down further to 34%. What they call the "Real Private Sector", in the same period from 1988 to 2003 had gone from 31% to 44%. But if we look at the overall Non-State sector, in 2003 it accounted for 66% of GDP. And the document concludes, "the private sector is now the dominant sector of the Chinese economy". It continues, "the share of the private sector is even larger if we take into account that a significant percentage of the collective farms are in effect privately controlled and that the private sector is in general more productive than the other sectors of the economy."

We've seen this happen before elsewhere on a smaller scale. In South Korea the state developed the big corporations, but that in no way defined it as a deformed workers' state, or even a state in transition. It was a weak capitalism that could only be built on the basis of the state investing the capital, because the bourgeoisie was too small and too weak to do that. In the context of China we see a similar process on a much bigger scale. Although a much stronger bourgeoisie is being created in China, it still does not have the resources to run and develop the major corporations, many of which are still state owned. Therefore it is the state that governs China and this state is building capitalism and the bourgeoisie.

If one looks at the legal structure in China one sees important changes being made in the last three or four years to bring the legal framework into line with the new property relations. In 2004 important changes were made to the Constitution, stressing the role of the non-state sector in supporting economic activity in the country and protecting private property from arbitrary seizure.

Until recently there were laws in China which regulated or prevented private companies from entering such sectors as the public utilities and the finance services. In 2005 these laws were abolished, allowing the private companies to enter these sectors. It is happening now also in the banking sector. They are beginning to privatise and are allowing foreign capital to come into the banks. In fact the bourgeois analysts, when they write about China today, go into great detail into the laws and legal structure that need to come into line with the new property forms. They see them as leftovers from the past that have to be removed to facilitate the functioning of private companies.

In China property relations have changed, but although much has already been done to bring the legal structure into line there are still remnants of the old legal system. The development of new property relations can indeed come into conflict with the old legal forms; they do not necessarily come into line with the economic base immediately. Sooner or later however, this "superstructure" must come into line with the economic base. As Karl Marx pointed out in 1859 in his preface to A Contribution to the Critique of Political Economy:

"At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or - this merely expresses the same thing in legal terms - with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure." [our emphasis]

In China we are not dealing with a social revolution, but a counter-revolution. Nonetheless the point Marx made is still valid. Once the property relations change, the legal superstructure must follow suit. Thus we can expect that the process of bringing the legal "superstructure" into line with the economic base will continue apace. Although there is some opposition within certain layers of the bureaucracy, "sooner or later", the two must be brought into line. Already much has been done, as the changes to the Constitution testify.

Entry into the WTO

Another key turning point was to come in November 2001 when China decided to join the World Trade Organisation. The question of entry into the WTO is an important one. On joining the WTO China committed itself to abandoning all control over foreign trade within five years and they have been doing that step by step ever since. The reason for China joining the WTO is obvious. The present Chinese economy can only exist if it is tightly linked to the world economy. It depends heavily on exports and it has to have international agreements on trade. It must participate fully in the world economy. This in turn accelerates the process of capitalist transformation inside China.

The abandonment of state control of foreign trade is an important element in opening up China to the world market. Let us recall that one of the key elements in the Bolshevik programme ‑ and that Trotsky firmly defended against Stalin and Bukharin ‑ was that a workers' state surrounded by a capitalist world must have a state monopoly of foreign trade. This was the case especially in an underdeveloped country.

Bukharin also held the idea that to develop the economy it was necessary to allow a layer of the peasantry to enrich itself. By this he thought that material incentives would produce greater efficiency and production. Bukharin, however, had no idea of where his ideas could lead. He did not envisage his position as being one that would lead to the return of capitalist relations. But had his position prevailed there would have been a return to capitalism in the Soviet Union as early as 1928. Even at that time the pressures from capitalism were felt very strongly. There are parallels between Deng and Bukharin. Even the language they used was similar. Deng used the slogan "to get rich is glorious", while Bukharin's slogan was "Get rich!"

The state monopoly of foreign trade was in essence a protective measure against the incursion of capitalist influences from outside. If one looks at the history of capitalism in the advanced countries, one see that protectionism was used at one stage to protect their home markets and free trade only becomes the favoured policy of the bourgeoisie in the later stages. Even the British bourgeoisie protected their market while they were developing their industry. Once they had developed modern, competitive industries they didn't need protectionism. By this stage their industry was strong enough to dominate the world market. As Marx and Engels wrote in the Communist Manifesto, referring to the bourgeoisie, "The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls..."

Until recently this was also the case in today's underdeveloped countries. Pakistan, for example, had a lot of tariffs and protectionist measures up to around 20 years ago. But in the recent period they have been forced to open up their internal market. The imperialists are dictating policy to these countries and they cannot tolerate protectionist measures, although at the same time they jealously guard their own markets in agriculture, etc. They have a pressing need to open up all markets to their goods.

The difference between China and Pakistan is that the imposition of the so-called open market on Pakistan has meant the destruction of thousands of industries and factories. The level of development of Pakistani industry was too low to resist outside competition. However China is not Pakistan and the Chinese government must be thinking, "We are strong enough now, we have the productivity to face up to outside competition." This however, is provoking retaliatory measures especially on the part of the USA, where protectionism is being sought as a measure to defend the US market against cheap Chinese goods.

Cold transition?

It is now clear that there has been a transition to capitalism, but how did it happen? There has been no armed counter-revolution, no major confrontation between different wings of the bureaucracy. Trotsky once used the idea of the film of reformism being played backwards. He explained that for a counter-revolution to take place there would be some form of violent conflict. Only then would a return to capitalism be possible. He was saying the system couldn't be "reformed" into capitalism.

Here we must learn from Trotsky. We must take from Trotsky not just isolated sentences here and there, but the method that he used. He was dealing with Russia in the 1930s where the traditions of the revolution were still alive. The Russian working class had played the key role in the revolution and were conscious of what a return to capitalism would have meant. That working class would have resisted capitalist restoration. Also the international situation determined a different balance of forces within the Soviet Union. A significant layer of the bureaucracy had an interest in maintaining the state plan.

However, in the Soviet Union Stalinism survived for several decades, far longer than even Trotsky could have anticipated, for more than 70 years in fact. Quantitative changes determine qualitative changes. In that period the revolutionary traditions were eradicated from the consciousness of the workers. The generation that had experienced the revolution was gone. The new generations witnessed a voracious bureaucracy raising itself further and further above the masses. They saw nothing but utter mismanagement, waste and corruption at all levels and towards the end all that was left facing them was a system which was grinding to a halt. Sometimes a regime can be so rotten that the ruling class ‑ or the ruling caste ‑ is incapable of resisting even the smallest pressure once the movement breaks out from below.

The idea that in order to build the basis for capitalism to develop, a bourgeois revolution is necessary comes from the experience of the classical bourgeois revolution in France in 1789 or in England in 1640. The bourgeoisie had developed, building up its wealth within the confines of feudalism and eventually it had to break through those limits. The young bourgeois class led the nation against the landed aristocracy and overthrew feudalism, creating the conditions for modern capitalist development. However, once capitalism had developed in a few key countries (Britain, France, the USA,) it meant that a repetition of the manner in which capitalism had been developed in these countries became practically impossible in the other less developed countries. Marx could se this in the case of Germany, where he stated that the German bourgeoisie had become reactionary even before it had come to power.

The Mensheviks did not understand this question. They expected all countries to go through the same stages. Russia was underdeveloped, with a huge peasantry and landlordism. They thus mechanically superimposed what had happened in France and Britain onto Russia. Therefore, for them, the task of Russian Communists was to support the "progressive bourgeoisie". They did not understand what Trotsky explained in his theory of the Permanent Revolution. In the epoch of imperialism the bourgeoisie in the underdeveloped countries could not play the progressive role they had played in France or Britain.

This also explains why the development of capitalism in other countries didn't always come about through the classical mechanism of the bourgeois revolution with the bourgeoisie leading the masses. That is not how capitalism came into being in Japan or Germany, for instance. Today these are two of the most powerful countries in the world. In Japan it was the bureaucracy of the feudal state, under pressure from US capitalism, that guided the movement towards capitalism, note the weak and effete bourgeoisie of the time. Why was this? Because world developments dominate all processes. The future of Japan as a powerful nation could only be maintained if they developed capitalism. Therefore, because the bourgeoisie in Japan was not able to carry out its historical role, another class carried out the tasks. In Germany it was the Junkers of the old feudal state apparatus, who oversaw a similar process.

However, precisely because there was no revolution, there remained remnants of the old feudal system. In Germany these contradictions were only finally resolved as a result of the aborted 1918 proletarian revolution, which at least completed the unfinished tasks of the bourgeois revolution. In Japan the same task was carried out by the American occupying forces after 1945. McArthur forced through the agrarian revolution in Japan for fear of the effects of the Chinese revolution on the Japanese masses.

In these cases there was no "bourgeois revolution" but a kind of "cold" transition from one system to another. Lenin stressed that history knows all sorts of mutations and transformations. The real live process does not always necessarily correspond in every detail to the textbooks! There is no rigid rule of how a social transformation comes about. As Marxists we must be aware of this, otherwise we will be thrown hither and thither by events that do not correspond to mechanical and preconceived views.

We therefore have to place Trotsky's view on the "cold transition" in the historical context in which he raised the idea. We also have to see, however, that Trotsky provided us with an insight into how the bureaucracy could easily adapt to a capitalist restoration. He explained that in the Soviet Union if there were a bourgeois counter-revolution the new ruling class would have to purge far fewer elements from the state than in the case of a political revolution. This is precisely what happened with the old Soviet bureaucracy when Yeltsin came to power, and the Chinese bureaucracy is no different. Trotsky's exact words in the Revolution Betrayed were:

"If-to adopt a second hypothesis-a bourgeois party were to overthrow the ruling Soviet caste, it would find no small number of ready servants among the present bureaucrats, administrators, technicians, directors, party secretaries and privileged upper circles in general. A purgation of the state apparatus would, of course, be necessary in this case too. But a bourgeois restoration would probably have to clean out fewer people than a revolutionary party. The chief task of the new power would be to restore private property in the means of production. First of all, it would be necessary to create conditions for the development of strong farmers from the weak collective farms, and for converting the strong collectives into producers' cooperatives of the bourgeois type into agricultural stock companies. In the sphere of industry, denationalization would begin with the light industries and those producing food. The planning principle would be converted for the transitional period into a series of compromises between state power and individual "corporations"-potential proprietors, that is, among the Soviet captains of industry, the émigré former proprietors and foreign capitalists. Notwithstanding that the Soviet bureaucracy has gone far toward preparing a bourgeois restoration, the new regime would have to introduce in the matter of forms of property and methods of industry not a reform, but a social revolution."

The social basis of the Soviet Union was that of a workers' state, with a state-owned centrally planned economy, and yet if it had transformed into a bourgeois regime not too many people would have had to be purged. This was because they were already privileged elements and they would have transformed themselves from privileged bureaucrats of the workers' state into privileged servants of capitalism. On the other hand, a political revolution would have had to impose on many of those bureaucrats a worker's wage and remove their privileges. Therefore a bigger conflict would have come about. The present situation in Russia shows that Trotsky was right.

Trotsky's analysis of the USSR furnishes important elements that help us to understand the present-day process in China. Here too we are dealing with a privileged caste, which as Trotsky stressed, would want at a certain point to become the owners of the means of production as a guarantee of their privileges.

There have been several factors that have pushed the Chinese bureaucracy in this direction. There was the massive post-World War Two boom in the capitalist west, with an unprecedented development of the productive forces. This was followed by the crisis of the Stalinist regimes in Eastern Europe and the Soviet Union. The Marxist tendency took note of this in the early 1970s. The Chinese bureaucrats took note of it too. The rate of growth in the Soviet Union went down to 3%, 2% and then zero. The system was stagnating. Finally Eastern Europe collapsed and then two years later the Soviet Union collapsed also. The Soviet Union lost huge areas of its territory.

These were very powerful factors in determining the thinking of the Chinese bureaucrats. They started off with what was basically a Chinese version of the NEP, trying to get the economy to be more efficient, more productive. They were observing world developments and the whole situation was pushing them in a certain direction. Just across the border in the Soviet Union they could see absolute chaos and disaster. They must have thought, "we are not letting that happen here. We have to introduce market methods but we are going to control the process ourselves". So they did it gradually, step by step, but once they had embarked on that road the process assumed a logic of its own eventually ending up with the present situation.

Now in China there are very powerful bourgeois interests. The new bourgeoisie is using the Communist Party to defend their class interests. In these conditions could the bureaucracy reverse the process and carry it out successfully? We believe that the process has gone beyond the stage where that could happen without a major conflict. If a wing of the Chinese bureaucracy were to decide to go down that road it would involve a major confrontation with the pro-capitalist wing. Thus a "cold transition" back to some form of bureaucratically planned economy would not be possible. But this is a hypothetical perspective as there are no indications that any such wing exists.

An important element in the Chinese equation is the size and experience of the working class. Any movement against capitalism would now have to be based on a mobilisation of this working class and the Chinese workers would not accept a movement back to Stalinism; they would tend to move forward towards genuine socialism, to real workers' power.

Undoubtedly, in such a scenario a section of the party would be affected. From letters and articles that have appeared in the Chinese press it seems there are still people in the Chinese Communist Party who believe in the ideals of the 1949 revolution, and these would be affected by a revolutionary movement of the working class and would be pushed into conflict with the dominant pro-capitalist wing. This would imply a split between different layers, with the tops defending the new capitalist relations, and some of the lower layers being dragged behind the movement of the working class.

Trotsky referred to the existence of a "Reiss wing" in the Russian bureaucracy, meaning a wing that wanted to return to the ideals of the October revolution, to genuine Bolshevism. In the 1930s such a wing existed. The revolution was still a relatively recent event and many of the party members from the period prior to the revolution could see the differences between Stalinism and genuine Bolshevism.

However, the Stalinist regime in the Soviet Union survived for decades. Stalin gradually destroyed any link to the ideals of October. In spite of this at the time of the collapse of the Soviet Union in 1991 there was a wing, albeit a small minority, that sought the ideas of genuine Leninism.

In China the situation is somewhat different. A "Reiss wing" as described by Trotsky is ruled out. The 1949 revolution was not based on the ideas of Lenin. The Chinese Communist Party had been transformed into a Stalinist organisation long before it came to power. Therefore even those who come from the period prior to 1949 have Stalinism as a point of reference.

We have to understand the difference between a "degenerated workers' state" and a "deformed workers' state". A degenerated workers' state is obviously a state that has become a deformed workers' state. But the only "degenerated workers' state" ever known in history was the Soviet Union. It started off as a relatively healthy workers' state and due to the isolation of the revolution it underwent a degeneration, with the bureaucracy usurping power. To complete this process the Stalinist bureaucracy had to physically eliminate thousands upon thousands of genuine Communists who understood the difference between what the Bolsheviks had struggled to build and the monstrous caricature that evolved out of the isolation of the revolution in an underdeveloped country.

In China there was no period when the state had been a healthy workers' state. There was never a period of genuine workers' democracy, of workers' power. The Chinese state started off from the very first day that the Communist Party came to power as a deformed workers' state. In actual fact the Communist Party inherited the old Mandarin state apparatus. Even in the early days of Soviet Russia Lenin pointed out that if you scratched the surface of the workers' state you would find the same old Tsarist state apparatus, for especially in a backward country, the new state had to count on many of the old officials. But at least in the times of Lenin the workers, through their organs of power, the Soviets, could curb the conservative tendencies of this stratum. But in China this was not the case.

In spite of this, even if in a distorted manner, there must be elements within the party who look with horror on the transition to capitalism in China. They see how the workers have lost all their rights and all the ideals of the revolution have been trampled on. They hark back to Maoist China which they view as a society which was far more "equal". But in the present context, with the development of such a huge proletariat, the old Maoist idea of basing everything on the peasantry would have no meaning to today's workers. Today the proletariat has become a dominant force, therefore workers in the cities who seek a way out through a "return to Mao" would find themselves raising the question of workers' power. Such a development would have an impact on the party which would inevitably break up along class lines.

Among the top layers of the bureaucracy, however, there is no evidence of a wing that wants to return to the old state-owned, centrally planned economy. From the point of view of the bureaucracy the system is "working". It is doing very well in fact! We have pointed out what Trotsky said about the bureaucracy wanting to pass on their privileges to their offspring. Today many of the sons and daughters of the bureaucrats have been transformed into owners of the means of production. Among this layer there is no desire to return to a nationalised planned economy. There is no material basis for them to wish to do so. They would resist any attempt to turn the clock back, and they would have the backing of the state.

• Where is China going? – Part One Part Two and Part Three by Fred Weston (May 2006)