Welcome, Dick. It happened here. I'm your host, Na Wong, and today we're going to be talking about something a little bit different. In the last half decade, a growing political focus on China has transformed a cottage industry of American China watchers into a sprawling metropolis of pseudoanalysis, a veritable machine that turns out racialized fear of the Chinese other and transforms it into economic papers that close with quote unquote policy solutions about the so called China problem.
In these circles, a consensus is emerging about what they call Chinese state capitalism and its supposed risk of the United States. China's economy, they argue, is not a free market economy like that of the United States. Instead, China's large array of state owned industries and its willingness to use investments to incentivize specific kinds of research while protecting companies from pure market competition means that the state, and not the market, dictates the course of the Chinese economy.
Under these assumptions, the Chinese economy poses two major threats to American companies in the American security state. First, state owned industry is subsidized by the state will inevitably outcompete American companies because American companies can't match the sheer quantity of capital held by the Chinese state, which violates the fairness and competitiveness of the free market by making companies
compete on unequal grounds. Second, the close ties between the Chinese government and state owned industries and even private Chinese companies means that their technology will be used by the CCP to strengthen its military by stealing American technology. The problem with this consensus at a fundamental level is that it's utterly uninterested in how Chinese state owned enterprises known as soees actually functioned. And this is a real problem because Chinese sos are not what you or the people
righting American forum policy think they are. So today we're going to take a dive into the belly of the state and figure out how soos actually function and determine what this actually does to the prevailing theories about how Chinese economy works and what it means for both the American and Chinese working classes. But before we get into the structure of the SOE, we need to talk about
state capitalism. State capitalism is an old term. Most of the people writing about it will trace it back to Lenin's New Economic Policy, a massive shift towards the market in the Soviet economy of the early twenties. The New Economic Policy relegalized private capitalist firms, albeit in a much reduced capacity, with a very large state sector driving the economy as a whole, a condition Lenin dubbed state capitalism.
But even using state capitalism to describe both the New Economic Plan and the current situation in China reveals a profound misunderstanding of both Lenin's NEP and the modern Chinese economy. For one thing, during the NEP, state owned industries accounted for at least seventy percent of Soviet industrial output, increasing
to seventy seven percent by the end of the policy. Meanwhile, despite the height behind Chinese state capitalism, china state sector represents a measly forty percent of China's economy, uniquely high for a capitalist economy, but quite literally the inverse of the relationship between capitalist frames and the state. In the USSR that sixty percent of China's GDP is private and
only forty percent is generated by the state. And don't look too closely at that forty percent, because only thirty percent of it is from actual state industries, the other ten percent resulting from the regular function of the state itself. Shows what actually drives the Chinese economy, not the state at all, but the market. This is very important because the story of the Chinese economy in the last forty years is not simply the story of a state run
command economy transforming into a market economy. It is also and arguably primarily, the story of the market consuming the state from the inside out. This becomes more clear the closer you look at how state owned enterprises are actually structured, and it is here the weakness of the very term
state owned enterprise comes into focus. Academics and journalists write about state owned enterprises as if the word means one specific thing, but the reality is that there are an enormous number of different kinds of sos, with different structures and different relationships to the state. When regular people think about state ownership, it tends to invoke the specter of the USSR in a Soviet style sooe, and will take as an example of Chinese SOE the Socialist period, which
functions similarly. The firm is literally a government department. For example, in nineteen seventy nine, China established the Bureau of nonferest Metals and this is the best name you're going to get out of the CCP. In this entire episode, that bureau was in charge of running a luninium production. The government ministry simply ran the mines and the refineries and the factories directly, and everyone working in the factory was
a direct government employee paid by the state. This is also pretty close to how the American Post Office is structured. But Soviet SOEs crucially were not firms that competed for money in the market. They worked towards a production plan and were assigned resources based on their output. In this way, they're closer to a municipal water service than most modern SOEs. Their job, in theory was to make a thing or
a service, not make money. Modern Chinese soees, despite sharing the same name as or socialist period predecessors, are very different. For one thing, Modern Chinese SOEs, as well as a lot of other state owned companies like the Saudi government's oil companies Saudi a Ramco, are not directly part of the government at all. Instead, they're structured as regular corporations
whose stock happens to be owned by the governments. This shareholding relationship is one of the most common kinds of modern SOEs, but as we'll see, they make ownership and management structures increasingly complex. The other major difference from Soviet firms is that companies like Saudi a Ramco and modern Chinese soez are for profit companies. I don't exist to provide a service, they exist to make money. This gets
very weird very quickly. For one thing, while we tend to think of state owned enterprises as belonging to the national governments, municipal, provincial, and even disher Can county governments in China have their own SOEs. On a conceptual level, this makes sense. China's economy is the size of a continents, and individual provinces have the geographic size, population, natural resources, and economy of entire nations, which means that provincial soees
can rival national firms. But this also means that state owned industries from different levels of government are directly competing with each other on the market. This is something beyond the experience of previous theorists of the state and capitalism. Frederick Engels, the close friend of Karl Marx, was able to predict the rise of capitalist state owned industries writing quote. At a further stage of evolution, this form also becomes insufficient.
The official representative of the capitalist state will ultimately have to undertake the direction of production. This necessity for conversion into state property is felt first in the great institutions for intercourse and communication, the post office, the telegrams, the railways.
If the crisis demonstrates the incapacity of the bourgeoisie for managing any longer modern productive forces, the transformation of the great establishment for production and distribution into joint stock companies and state property shows how unnecessary the bourgeoisie are for that purpose. All the social functions of the capitalists are
now performed by salaried employees. The capitalist has no social function than that of pocketing dividends, tearing off coupons, and gambling at the stock exchange, with the different capitalists to spoil one another of their capital. At first, the capitalist
mode of production forces out the workers. Now it forces out the capitalists and reduces them, just as it reduced the workers to the ranks of the surfplus population, although not immediately into those of the industrial reserve army, but angles imagined the state as a collective capitalist, replacing the
individual capitalist. What no one could have foreseen was capitalists break was capitalism breaking the collective nature of the state, entirely hollowing it out until its chunks competed with each other on the market. This is the state of modern Chinese SOEs. These SOEs are capitalists, firms subject to market discipline. They can and will fail and go under if they aren't making enough money, and the government can and will tear them apart and force the still state owned pieces
to compete against each other. These state owned industries also largely are not supposed to be monopolies. Firms they get too large and powerful can and will be broken up and the parts once again set to compete against each other. Weirder still, these SOEs are also listed on the stock markets, meaning individual capitalists, and as we'll see later, even foreign firms can buy forty nine percent stakes and nominally state
owned industries. Now, if the state doing market competition against itself wasn't weird enough for you, let me introduce another complication. The State Owned Asset Supervision and Administration Commission of the State Council and no the state owned Asset Supervision and Administration. Commission of the State Council is not a name that
sounds any better in Chinese. If you have a bureaucracy rooted in Leninism, the product is a veritable corricopia of the most absolutely dogshit name you've ever heard in your entire life. This commission is better known for obvious reasons as Sassak, and it is the government body that owns the shares of most of the largest firms in China, which are known as the national champions. Now you could be forgiven for thinking you now understand the structure of
Chinese soez. Sasak, which is a part of the state, owns the SOEs. Bob's your uncle, Everyone goes home for the night, and the episode ends right here. Unfortunately, it is way more convoluted than that. When I said SASAQ owns the shares of the largest firms in China, that's only true in a technical sense. What Sasak actually owns are the shares of massive holding companies, companies that exist on paper but whose existence is purely dedicated to owning
the shares of other companies. These holding companies own the shares of the publicly traded companies. You might have heard of, like Sinopek China state owned oil companies. And this is where the simplistic narrative of the Chinese soe, a single firm owned by the state under its direct political control, completely falls apart, because again, the state doesn't really own these firms directly. What they own is a holding company
that owns the stock of the sues. That holding company, however, is the actual basis of the organization of Chinese state ownership. The building blocks of the Chinese state economy aren't single state owned enterprises at all. The economy is actually composed
of what are called business groups. American listeners may not be very familiar with business groups, but there are a common sight in what became known as the Tiger economies, a series of economies that's all rabid industrial development in the post World War two era, largely fueled by the demands of American military supply lines for its wars in
Korea and Vietnam. The two most infamous are the Japanese Keretsu, the successor to the old Japanese zaibatsu that dominated the pre war Japanese economy and which were to some extent broken up after the war, and Korean chabel conglomerates. These massive groups of businesses are either owned by the same people or families in the case of the chabel, or
linked by mutual shareholding of each other's companies. Like kedatsu, the groups cooperate and coordinate the business strategy instead of competing against each other, which allows them to carry out a level of long term planning that's sometimes difficult for
individual for profit companies. Chinese economists sent to Japan to study kedatsu in the seventies and eighties returned with policy in hands, But the business groups that eventually emerged in the Chinese economy after an extended process of trial and
error are different than their Korean or Japanese counterparts. Where chabel are organized around families and Kedatsu are organized around a commercial bank that provides financing for the companies and the group, Chinese businesses are organized by those holding companies one hundred percent owned by Sassak and therefore the Chinese State. Those holding companies, also sometimes called core companies, own the majority of the stock of a variety of public betraded companies.
They also own a finance company which finances the companies and work with research institutes which carry out scientific and research development for the entire group. These research institutes, which are often university affiliated, are technically nonprofit, but take money from the core companies in exchange for the research development they do. Chinese business groups are often massive, organizing hundreds of companies who also maintain trade and supply relations with
hundreds more companies technically outside the group. These groups are organized by what's called articles of grouping, which the core holding company who owns the stock, and the rest of the companies get those companies to sign. These articles form a top down structure for the entire group that also includes council and management bodies for the entire group, with
representatives from each of the companies in the group. This structure, in theory, is how the CCP transmits policy down from single holding companies to all of their downstream subsidiaries and allies.
And this is important because, at least in theory, business groups are supposed to carry out government and dose and economic developments, but in the real world this is a significant challenge because again, even individual business groups comprise hundreds of companies, and the states grasp on them as often tenuous, as seen by a wave of state owned companies that theoretically are supposed to make things getting into real estate speculation a problem the CCP has been attempting to deal
with since two thousand and eight and only really has gotten under control in the last two years. But you know who will not do housing speculation instead of making ads for you. It is the companies and the products and services that support this podcast. And we're back so confronted with the enormity of the scale of Chinese business groups, how does state control over these groups actually work? In theory,
regulation operates around two channels. SASAK owns the holding companies, which allows it, in theory, to make decisions that a shareholder would be able to make it a private corporation. There's also a parallel corpus structure directly run by the party, and high ranking people in the corpus structure become party members and are sent to cadre trainings at places like
the Central Party School in Beijing. Meanwhile, people swap between SASSAK and high level manager positions, and the heads of large sos also have positions in the Chinese government itself. Trying to explain all of the positions they have and the councils they're on and their technical ministerial ranks is a disaster because oh boy, if you think the American government is confusing, try sorting out who does what in
a party state. The moral of the story is that the CCP tries to keep control over the enormous number of companies it technically owns through control of who gets appointed as the head of soees through Sassak, which is directly a part of the state, and by integrating SOE
heads into various government and party bodies. They also are somewhat embarrassingly given that they owed these companies forced to directly go after them through the law and through the court system, which works sometimes and also doesn't work other times.
But this relationship is multidirectional. Leewhen Lynn and Curtis J. Milhoft, two scholars who've written extensively about Chinese corporate structure, argue convincingly that the deep integration of the Party into soees after the state owned industries have been corporatized, that is, turned from direct state industries run by state employees to profit seeking market corporations own a through shares, was a way to buy the Party off and allow these firms
to become more capitalists in ways that wouldn't have worked if the Party wasn't also getting rich off of it. It's not just that China has state owned industries. It's that the corporatization of state owned industries has made the Party and the Chinese state increasingly capitalist, and this raises
another question. As the Chinese state grows more capitalists, are public and private Chinese firms even all that different, Private firms also have links to the state through equity, have joint ventures with soees, where private companies will own a part of a company and an SOE will own another part of a company. Private companies expand and get access
to credit through partnering with local sos. In essence, many of the things that are supposed to make sos different from private companies are shared by both, from the profit motive to state affiliation as milhop to put it quote, functionally, SOEs and large pos private enterprises in China share many similarities in the areas commonly thought to distinguish state owned
firms from privately owned firms. Market access received of state subsidies, proximity state power, and execution of the government's policy objectives. A complete account of Chinese state capitalists, and must explain these similarities. Even figuring out what legally is an SOE and what's technically still a private firm gets very weird,
very fast. ZT, for example, a giant Chinese telecom telecom company is owned by a bewildering array of shell and holding companies, which are in turn owned by other companies, some of which are state owned. This is the level of ownership confusion we're working at here. If the largest stake of a company is owned by a holding company that's owned in turn by a combination of two soees who own fifty one percent of the stock and a private investor's company who owns forty nine percent of the stock,
is the company state owned? And it gets worse Inzte's case because even if you assume, okay, the majority stake in this company is owned by an SOE, therefore it's state owned, you would assume that the state or a state owned company would manage the corporation. Right. Wrong. In Zt's case, the soees worked out in agreement with the other investor such that ZT is technically state owned but
privately managed. And this, it turns out, is a very common arrangement because of laws about foreign ownership of companies operating in China, many state owned enterprises that are actually joint partnerships between sos and foreign corporations, where the SOE owns fifty one percent of the stock and the foreign corporation owns forty nine percent of the stock while running the actual company in extracting profits from it even one
hundred percent. Chinese firms, of which there are many, pose a challenge to the traditional conception of sos as run by the state for the good of the state and its political objectives. This goes back to their structure as corporations the state owns by shareholding. This means, as I've emphasized, that these sos aren't government ministries, their companies trying to make a profit and are run by their own managers. These firms have a total workforce of seventy million people,
which makes direct regulation very difficult in practice. This means sos are a lot more autonomous in direct state control, even with all the state guards put in place than you'd think just from the word state owned industry. Another thing that makes sooez more like private companies is that money from soez goes back to the company and not to the state, to which it pays dividends, but not much else. This means that soees have their own revenue
stream that's not dependent on state budget allocations. Meanwhile, private firms like SOEs are operated by members of symbolic party congresses, and private firms also get state subsidies and access to loans from state banks. A common canard about the unfairness of anti competitive Chinese soez it applies to private firms as well, And at this point I must point out that any company anywhere in the world can make money by allying with the state and getting access to state resources.
The US does this too, especially state and local governments, who are all too happy to give enormous tax breaks and even provide prison labor to private companies. Meanwhile, tech companies like Amazon and Google are kept a float by massive government contract to say nothing of the American defense industry.
In the US, we call this corruption, or at least used to until it became legal to literally buy senators, a thing that nat Sek Dipshits always seem to forget when they talk about the uniqueness of the Chinese economy and its relation to subsidies. There are obviously differences between the US and Chinese economies, but arguing that businesses having ties to the state which they extract benefits from constitutes
a unique form of capitalism as incomprehensibly absurd. None does this have stopped China watchers from the most rabid reactionaries and the most stalwart or self described style wart communists to declare that China carries out something called industrial policy through its soees, which makes it different from other neoliberal states.
So what is industrial policy? In theory, industrial policy refers to the state giving subsidies and funding to specific corporations in order to pursue specific economic objectives the market wouldn't normally have pursued. These writers point the preferential treatment that Chinese sos have credit and subsidies that they receive from the government as evidence of the subordination of the market to the political which they also claim is essentially a
form of socialist state planning. My response to this is that I will accept that an see getting a subsidy is socialist state planning. The moment they agree that the US as a socialist state because of its coren subsidies despite writing about China somehow turning everyone into anarchical capitalists. State subsidies in the form of direct cash transfers, tax breaks, preferential legal treatment, technology transfers, and a thousand other forms of state aid are as old as capitalism itself and
are pretty normal even under neoliberalism. People describe these measures as industrial policy, using state favor to promote certain industries, but corn subsidies put lie to the claim that industrial policy is some unique thing of a new era emerging in capitalism that had totally disappeared with neoliberalism. American corn and other agricultural subsidies are one of the largest and most expensive industrial policy regimes in the world, constituting half
a trillion dollars spent since nineteen fifty five. They are also written in as exceptions to most of the world's major free trade agreements. We also need to ask what is the difference between industrial policy, which is state strategic investment in certain sectors to develop their economy, and regulatory capture, where control over agencies or even the legislature itself is
taken over by specialistist groups. This question sounds silly, but the results a company in a sector getting handed a pile of money in various forms by the state looks exactly the same. Those corn subsidies arguably are industrial policy. They were technically originally designed to ensure that the US would always have a supply of cheap food. But on the other hand, the real reason they exist has nothing
to do with planning whatsoever. They exist because the copala of legislatures from farming states have enough power to shut down both the House and the Senate if their demands aren't met. So every year the state bows to the corn lobby and pays them billions of dollars. So is this industrial policy or is it regulatory capture? And can the two even be distinguished? In capitalist countries? This is
a question we need to take very seriously. In the Chinese case, At the same time, we ask ourselves what is the actual objective of the Chinese state? Is it decoupling inmid trenchment from the West or is it making money? There is significant evidence that it's the latter. For one thing, China receives an enormous amount of foreign direct investment, something that everyone seems to conveniently forgets, even though it was one of the key elements that fueled Chinese industrialization and
plays a major role in the Chinese economy to this day. Meanwhile, US affiliates in China alone had over half a trillion dollars of sales just in twenty eighteen, while the focus of most analysis has been in flashy disputes between the US and China over their attempts to produce their own semiconductors.
China has also liberalized its foreign investment laws in the last few years and allowed foreign companies and industries like insurance to operate directly instead of running through joint partnerships with Chinese stakeholders. Even the chairman of SASSAK gave a speech in February about how his goal was to increase the profitability of Chinese soees. China is and will remain deeply enmeshed in the global capitalist economy, and this, I think is as much as their unwillingness to grasp how
SOEs actually work. The fatal flaw of analysis of the Chinese economy and its obsession with formal state ownership. These analyzes are not a serious attempt to look at the actual structure of the economic system the entire world, including China, lives under. There are several kinds of arguments that we
need to look beyond formal ownership to understand capitalism. More broadly, there is a somewhat complicated Marxist argument which holds that while we talk about capitalism as a system where the ruling class owns the means of production of the working class, which owns nothing, is forced to work for them, that's not all capitalism is. Capitalism is also a series of commodity production, in which objects confront each other in the market and appear as commodities with their own discrete values
based on abstract labor time. Generalize commodity production, which is people producing commodities from market exchange and not for other purposes, is the other core component of capitalism, and when you're dealing with generalized commodity production, it doesn't really matter whether the company that owns the holding company that owns the company that makes the commodity is owned by the state or a hedge fund or a bank or a softeign
wealth fund. It still reproduces commodity production, which means it's still just capitalism, but with more complex formal ownership mechanisms. There's also the David Graeber argument which goes, Okay, sure, state owned property is technically the property of the people TM, but try and to actually go there and see how fast the cops show up and take you away. Just like rivy ownership, you still don't own public property any substantive sense. It's just controlled by a different group of
bureaucrats with guns. And focusing purely on ownership to define an economic system gets you nowhere. And then there's my argument, which is that people are absolutely obsessed with looking at capitalism from the perspective of capital which means that they are absolutely obsessed with the question of ownership. But what happens if you look at so called state capitalism and the nature of state ownership from the perspective of the
working class, everything suddenly becomes a lot clearer. Soe workers are a bit better off than not us or we counterparts, but their jobs suck ass, their hours are long, and they don't make that much money. They are fully dependent on selling their labor to the market to survive. And all of these companies have hundreds of subsidiaries and suppliers with a variety of levels of state ownership, and people
who work for those companies' lives are even shittier. Meanwhile, the means of production and the physical infrastructure of so called state capitalism was built by work who were left with nothing but silicosis after turning places like Shenzhen from fishing villages to a city with a population of over ten million people in less than thirty years. This is the ultimate truth of the Chinese economy, just says, it
is the ultimate truth of the American economy. We sell our lives for nothing, and our only reward in the end is to die amidst the wonders of the world that was never ours. It could Happen here as a production of cool Zone Media. For more podcasts from cool Zone Media, visit our website cool zonemedia dot com or check us out on the iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts. You can find sources for It could Happen Here, updated monthly at cool zonemedia dot
com slash sources. Thanks for listening.