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the autumn of 1949 saw the end of China’s three-year-long civil war. With the military force of the ruling Kuomintang (KMT) in defeat, the rival Chinese Communist Party (CCP) was poised to take over the national government. On September 25, CCP chairman Mao Zedong (1893-1976) presided over a meeting of the Chinese People’s Political Consultative Conference, which was convened to make preparations for the creation of a new political regime—later known as the People’s Republic of China (PRC). Among the matters decided at the meeting was the design of the new national flag. It featured a big star flanked by four small stars, all in yellow and set against a red backdrop. According to the summary statement from the contributing designer (Zeng Liansong 1949), the big star symbolized the CCP as the country’s leading political force, and the small stars symbolized the four classes that Mao had defined in On People’s Democratic Dictatorship (June 30, 1949) as the social forces that the CCP must unite during and after the revolution: the proletariat, the peasantry, the urban petite bourgeoisie, and the national (indigenous) bourgeoisie.
The political symbolism of the new national flag reflected the thinking of the incoming rulers. Devastated by a century of conflicts and wars and deeply anchored in a premodern mode of production, the Chinese economy was underdeveloped. That reality was clearly incompatible with Karl Marx’s depiction of the material conditions necessary for initiating a transition into communism. So CCP leaders were prepared to oversee a largely private economy for an extended period of time after the revolution, as Mao had envisioned in an earlier treatise entitled On New Democracy (1940). What transpired in the following decade, however, substantially shortened that time frame.
Emboldened by the speedy economic recovery and the effective consolidation of political power during 1950-1953, Mao pushed for an accelerated process of socialist transformation. By 1959, private ownership of economic resources was virtually eliminated. Gone with it were the two capitalist classes represented on the national flag, which nonetheless remained the country’s most important political symbol. During the 1960s and 1970s, public ownership provided the foundation for a Soviet-style, centrally planned economy. Yet since the late 1970s, private ownership has made a comeback, first re-emerging as an element supplementary to the overwhelmingly dominant public sector, but gradually overtaking the latter as the leading force in the fast-growing economy. Today, the nonpublic sector produces some two-thirds to seven-tenths of China’s GDP and employs about 90% of the workforce. And capitalists, big and small, are exerting a significant influence on politics and socioeconomic life, arguably increasingly more than the two working classes represented on the national flag.
Reflecting on the vicissitudes of private ownership in China since 1949, one may get a strong sense of deja vu. Mao’s “new democracy theory” defined, ex ante, the mixed economy of the 1950s. Thirty years later, its essential spirit was resurrected by the “theory of socialism with Chinese characteristics” that the new paramount leader Deng Xiaoping (1904-1997) articulated in the 1980s. Deng’s central claim was that private ownership and capitalism could play a limited role in China’s development during “early-stage socialism” but would eventually be eliminated in an indeterminate long run. This so-called theory, however, was more of an expedient pretext for pragmatic strategies to cope with new realities than a coherent blueprint for the post-Mao transformations. The expansion and institutionalization of private ownership, among other things, are largely the result of ex post adjustments and adaptations to a series of unintended changes resulting from earlier reforms, rather than being the outcome of CCP leaders’ premeditated calculations. In fact, these changes and policy responses have even stretched beyond the limit set by Deng’s own theory, forcing the post-Deng leaders to scramble for justifications.
Ideologically, public ownership would have been far more consistent with the CCP’s continued claim to build a classless society as envisioned by Marx. From a practical point of view, it would also have provided the state with continuous and more direct channels to allocate resources and control socioeconomic activities. In fact, the ascent of private ownership since 1978 has by no means been a smooth process. Revived on a limited basis as a stopgap measure to address acute pressures for job creation and fiscal shortfalls, the private sector faced severe restrictions and discrimination in the early years of reform, when the state sought to marketize and internationalize the economy, mainly through a restructuring and expansion of public enterprises. That undertaking initially showed seemingly promising results but subsequently exhausted itself. Since the mid-1990s, the vast majority of public enterprises have been sold off or closed down, reducing the dominance of state ownership to a handful of strategically important sectors, such as banking, telecommunications, utilities, energy, air and rail transport, warehousing and storage, tobacco, and armaments. In the meantime, the government has not only relaxed or removed an increasing number of restrictions on the private sector, but also introduced new laws and policies to protect private property rights and facilitate their use and exchange. Since 2001, ironically, the CCP has increasingly welcomed and even encouraged private business people to become party members.
These developments, as well as their apparent tendency toward perpetuation, directly contradict the Party’s proclaimed commitment to socialism. The expansion of private ownership and capitalism under weak legal and regulatory constraints on negative externalities and opportunism also compounds many coevolving problems, such as growing inequalities, pervasive political corruption, increasing economic insecurity, environmental decay, and sinking moral standards. Together, they contribute to the growth of popular discontent with the CCP and undermine its legitimacy and ability to govern.
This fundamental predicament sets the case of China in sharp contrast with ideologically and politically motivated privatization movements in the former Soviet bloc and beyond.1 Why, then, have Chinese leaders had to come to terms with an institutional arrangement that they initially suppressed and still loathe deeply? The short answer, I argue, is that privatization of the postMao economy is largely due to the state’s increasing inability to rely on the public sector to address two critical concerns for regime survival: employment and revenue. How and why this inability has grown and consequently redefined the choice sets of the CCP is the focus of this book.
Here, I use the term privatization broadly. It refers to a process where private ownership becomes increasingly significant in the economy via two convergent mechanisms: the growth of genetically private economic entities, including those funded with foreign capital, and the conversion of existing public enterprises into purely or predominantly privately owned entities. This 
immediately raises a question. If state actions in reaction to the growing failure of public enterprises to address employment and revenue imperatives hold a key to explaining privatization, what has been the role of entrepreneurs and citizens-at-large in overcoming the obstacles to private ownership in market- oriented economic reforms and opening?
In fact, there are numerous accounts of the persevering, oftentimes ingenious efforts by economic actors to defy the odds and pursue profits by pushing beyond the boundaries of direct state ownership and control during the past four decades. The common story about the resultant growth of private economic activities is one that celebrates the triumph of entrepreneurship and markets. There is indeed much truth to it. What this study seeks to offer is a close examination of the changing structural contexts in which the roles of these essential forces have played out under the reign of political actors. The intended outcome is a more revealing view of the causal mechanisms at work.
The structural contexts that I analyze mainly concern the demographic characteristics of the country and the fiscal infrastructure of the state system. Both bear deep imprints of postrevolution history and have had profound implications for political and economic decisions and actions in the reform era. In particular, cumulative pressures to provide jobs for China’s baby boomers forced CCP leaders to take the first step toward privatization in the late 1970s, when they moved toward legalizing self-employment. Such pressures have since persisted and continued to accentuate the need for jobs beyond the accommodating capacity of the public sector.
The fiscal structure carried over from the Mao era, on the other hand, featured divisions and flows of revenue and spending under a multitude of stratified and fragmented government property rights over economic organizations. Efforts to restructure these complex relationships in the reform era altered the self-interest calculus of political actors at various levels of the state system. A major consequence was the growth and multiplication of opportunism in such forms as moral hazard in the supervision of public enterprises, rule bending in favor of private business and foreign capital, and direct use of public office for personal gain, all of which undermined the vitality and dominance of public ownership.
Entrepreneurs, including some of those initially serving as public enterprise managers; foreign investors; and their local agents were part of the story. Their economically and politically risk-taking behavior in pursuit of private profits contributed to creating and expanding markets and competition, developing alternative sources of employment and revenue, and exacerbating financial and governance problems in public enterprises. In the meantime, the emerging markets provided a platform on which to test out the institutional choices preferred by leading political actors for addressing employment and revenue imperatives on the basis of public ownership. As the inherent weakness of these choices was laid bare, and as the vitality of the alternative (albeit least preferred) choice—that is, privatization—was more evidently demonstrated, the degree of freedom enjoyed by the top decision-makers became increasingly limited. This, in essence, was how and why private ownership took hold as a necessary evil and eventually prevailed against the political will of the CCP leadership.