China: Building "Capitalism with Socialist Characteristics"

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HARVARD BUSINESS SCHOOL
9-706-041
REV: OCTOBER 16, 2006
DEBORA SPAR JEAN OI
China: Building “Capitalism with Socialist Characteristics” We must not act like women with bound feet! If we want socialism to triumph over capitalism, we should not hesitate to draw on the achievements of all cultures. We need to learn from other countries, including the developed capitalist countries. — Deng Xiaoping, 19921

In November 2005, the Central Committee of the Communist Party of China issued its 11th five- year plan. As was typical for such pronouncements, the plan touched on many aspects of China's economy, including its fiscal situation, its current account surplus, and its desire to equalize rural and urban incomes. But the central theme was growth. China, the plan announced, would continue to grow at 8% a year between 2006 and 2011. It would also try to tilt its expansion away from exports and investment, and increase government spending to help the poor.2 Already, China was the fastest-growing country in the world, a position it had held, with only a few breaks, for nearly 30 years. Although a handful of other countries (Japan, Singapore, Botswana) had also sustained average growth rates of over 9% per annum for more than a decade, China's rapid-fire growth was longer-lived than its counterparts and showed no signs of slowing.3 In China, moreover, growth was occurring across a population of nearly 1.3 billion, liberating millions of people from poverty and unlocking massive segments of demand. In 2004, China accounted for 12% of the world's total energy consumption and 15% of total fresh water consumption. It consumed 50% of the world's production of cement.4 Purely on economic grounds, therefore, China had become a phenomenon. It was the third-largest economy in the world and was frequently described as likely, within a decade, to surpass both the European Union and the United States in total GDP. Unlike these other countries, however, China was distinctly and explicitly a communist state. Under the leadership of President Hu Jintao, the Chinese Communist Party retained full control of the country's affairs and remained firmly committed to many of socialism's key tenets. All of the country's major banks, for example, remained tightly linked to the state, as did key sectors such as oil, petrochemicals, and steel. State agencies provided most of the country's still-limited financial services, and state-owned enterprises produced more than one-third of total output. Indeed, the state—and the Party—were central players in nearly all aspects of China's economy, guiding a development trajectory often labeled as “capitalism with socialist characteristics.” Professors Debora Spar and Jean Oi and Research Associate Chris Bebenek prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. It wasn't an obvious path to growth. But for nearly 30 years China had indeed been growing, thrusting its citizens into prosperity and its goods across the world. Between 1978 and 2005, China's per capita GDP had grown from $153 to $1284, while its current account surplus had increased over twelve-fold between 1982 and 2004, from $5.7 billion to $70 billion. During this time, China had also become an industrial powerhouse, moving beyond initial successes in low-wage sectors like clothing and footwear to the...
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