China allows capital to create efficiency, dynamism, technological diffusion, and global competitiveness. But it does not allow capital to become the highest power that organizes society, defines the direction of national development, controls public resources, and reshapes the political order.
This is part of the State Governance and Capacity Series.
The Question of Capital Is First a Question of Position
The most difficult part of China’s political economy for outside observers to understand is the complex relationship between the state and capital. It is a relationship of cooperation and constraint, use and vigilance, amplification of capital’s efficiency function and restriction of capital’s power to dominate.
Many Western narratives tend to reduce China to two extremes. One says that “China suppresses the market.” Another says that “China is merely capitalism disguised as socialism.” Both capture part of the phenomenon, but neither explains the real institutional logic. China has world-class private companies. The GDP generated by private capital in China is equivalent to the world’s second-largest economy, larger than the combined GDP of Germany, Japan, and South Korea. China has the world’s second-largest venture capital market, the world’s second-largest capital market, the world’s most powerful supply chain, and a highly competitive manufacturing ecosystem. It also has a strong state-owned enterprise system, industrial policy, financial regulation, a national security framework, and the Party’s ultimate leadership over the direction of economic development.
This is not a simple question of “more state” or “less market.” The real question is where capital is positioned inside the state, society, and industrial system.
The Communist Party of China’s attitude toward capital has never followed a linear path of “suppression, liberalization, and renewed suppression.” A more accurate description is that, in different stages of development, capital has been assigned different functions and different boundaries. Capital can serve as a productive tool. It can promote efficiency, employment, innovation, technology introduction, export capacity, and entrepreneurship. But capital cannot become the highest power that reorganizes social relations, captures public policy, controls critical data, dominates infrastructure, financializes basic social functions, and determines the direction of national development.
This thread runs through China’s entire political-economic history from the founding of the People’s Republic to the present. The existence of capital has never been the only question. What capital serves, who constrains capital, what capabilities capital forms, and whether accumulated capital turns into an independent form of social domination are the key questions for understanding the Chinese system.
1949 to 1956: Capital as a Transitional Productive Force
In the early years of the People’s Republic of China, the Communist Party of China was not governing a modern economy that had already completed industrialization. It faced a country that urgently needed to restore production after war, stabilize urban commerce, rebuild fiscal capacity, and reconstruct industrial order. At this stage, national capital, private industry and commerce, and urban commercial networks still had practical functions. They possessed production experience, business networks, urban employment capacity, and a certain degree of industrial organization. The state could not replace every commercial and industrial link overnight through administrative orders.
Therefore, the early PRC’s attitude toward capital was clearly transitional. Capital was allowed to continue playing a role in restoring production, stabilizing supply, maintaining employment, and participating in industrial and commercial operations. But its political position had already fundamentally changed. Capital could exist as a productive force, but it could no longer continue to exist as an independent structure of social power.
At this stage, the CPC’s core policy logic toward capital was essentially one of using and transforming capital at the same time. Capital was used because it still possessed the organizational capacity needed for economic recovery. Capital was transformed because the new political order would not allow the capitalist class to retain political and economic power independent of the state and the socialist direction.
As socialist transformation advanced, private industry and commerce were gradually incorporated into the socialist economic system through public-private partnerships and other mechanisms. The private ownership and independent operating rights of capital were reshaped, and capitalists were also incorporated into new political and social structures. On the surface, this looked like a process in which capital was “eliminated.” From the standpoint of institutional function, it was also a process through which the state absorbed the old organizational capacity of capital into the new national system.
This stage formed the CPC’s first basic judgment on the question of capital: capital is not merely a factor of production. It can also form class power, social organizational capacity, and political influence. For a new political regime oriented toward socialism and focused on national reconstruction, capital’s efficiency function could be used in stages, but capital’s independent power to dominate had to be dismantled.
The Planned Economy Period: Capital Withdraws, and the State Directly Organizes Production
After 1956, capital was no longer the main organizational form of the Chinese economy. Through planning, state-owned enterprises, fiscal systems, administrative hierarchy, price systems, material allocation, and the work-unit system, the state directly organized production, distribution, and social life. Market prices, private capital, entrepreneurial profit, and private investment moved to the institutional margins. Capital withdrew as an independent force, and the state became the direct organizer of industrialization.
This period cannot be summarized through a simple success-or-failure narrative. It left behind serious efficiency problems, but it also built the industrial base that later became indispensable to reform and opening. This is also the basic logic now emphasized in Chinese intellectual circles and among the senior leadership of the Communist Party of China: the thirty years after reform and opening cannot be used to negate the thirty years before reform and opening.
The planned economy period created a heavy industrial base, an engineering talent system, a state-owned enterprise system, infrastructure capacity, education and research systems, and an institutional memory of the state directly organizing large-scale industrial projects. China’s later marketization did not take place on an empty field. It introduced market mechanisms on top of an existing industrial system, technical personnel, state-owned assets, infrastructure, and national organizational capacity.
But the planned economy also exposed the deep problems that arise when the state replaces both capital and the market. Without sufficient price signals, resource allocation easily becomes rigid. Without profit constraints, enterprise incentives weaken. Without competitive pressure, technological diffusion and management improvement slow down. Without decentralized entrepreneurship, social vitality is suppressed. The state can directly mobilize resources, but it struggles to continuously process the dispersed information embedded in countless firms, households, consumers, and local markets.
The real legacy of this period was not simply “low efficiency,” nor was it merely “industrial foundation.” It left behind an institutional lesson: the state can directly organize industrial capability in critical periods, but long-term development requires markets, firms, capital, and dispersed information to be brought back into the economic circulation.
This was also the institutional background that made reform and opening possible. China did not reform because it suddenly embraced laissez-faire capitalism. It reformed because the planned system could no longer release enough productive power. The core of reform and opening was the reintroduction of markets and capital as productive tools while the state retained control over the direction of development and ultimate political authority.
Reform and Opening: Capital Returns as a Tool of Productive Power
After 1978, the Communist Party of China’s understanding of capital changed profoundly. Capital was no longer seen only as a symbol of class exploitation. It was also reinterpreted as a tool that could promote the development of productive forces. Individual businesses, township and village enterprises, private firms, foreign-invested enterprises, market prices, export orders, local investment promotion, land development, capital accumulation, and entrepreneurship gradually entered the main circulation of the Chinese economy.
This was a deep institutional shift. Capital regained legitimacy, but from the beginning this legitimacy had a clear developmental function. Capital was allowed to exist, expand, and generate profit because it could serve growth, employment, technology introduction, export capacity, and industrial upgrading.
Foreign capital brought orders, equipment, management methods, quality standards, and access to global markets. Private firms brought flexibility, competitive pressure, entrepreneurial spirit, and sensitivity to market demand. Local governments used infrastructure, land, development zones, tax incentives, investment promotion, and performance competition to combine local state capacity with capital accumulation. Township and village enterprises, and later private manufacturing firms, connected large numbers of rural workers, low-cost land, local relationship networks, and external market demand, forming the most dynamic part of China’s early industrialization.
Capital in this period was not freely floating capital. It was embedded in a strong developmental framework. Growth was the core source of political legitimacy. Employment was the foundation of social stability. Industrialization was the material base of national capability. Export manufacturing was the entry point into the world system. Capital could make money, but the process of making money also had to help China accumulate factories, equipment, worker skills, supply chains, tax revenue, foreign exchange, local fiscal capacity, and industrial capability.
The most important feature of this stage was the developmental use of capital.
Reform and opening was not the state surrendering to capital. It was the state rediscovering capital as a development tool. Capital was introduced to help the state solve problems of information, incentives, and efficiency that the planned economy could not solve. Capital was encouraged because it could connect dispersed individual effort, local competition, entrepreneurial risk-taking, and global demand into a new system of productive power.
But the return of capital to the Chinese economy did not mean that capital acquired political sovereignty. The most important institutional feature of China’s reform and opening was precisely this: after markets and capital were enlarged again, the state still retained the ultimate power to set direction, manage risk, and define political boundaries.
1992 to 2012: Capital Expansion and the Socialist Market Economy
After 1992, China’s socialist market economy framework gradually took shape. The market economy acquired a clearer institutional status. The non-public economy moved from being a “supplement” to becoming an important component of the socialist market economy. Private firms and entrepreneurs were gradually incorporated into the category of builders of socialism with Chinese characteristics. After China joined the WTO, capital, labor, land, infrastructure, and global demand combined to form the world factory system.
This was one of the most important periods of capital expansion in China. Manufacturing capital expanded export capacity. Real estate capital drove urbanization and local fiscal cycles. Internet capital reshaped consumption, payments, logistics, and digital platforms. Financial capital became deeply connected with local governments, real estate, infrastructure, and corporate expansion. The vitality of the Chinese economy rose sharply, and Chinese companies began to occupy an increasingly important position in global supply chains.
This period also produced one of the most creative aspects of China’s system: state-owned enterprises, private firms, foreign capital, local governments, and global capital were not separate systems. At different levels, they formed a composite structure of Chinese industrialization. State-owned enterprises provided the foundation in energy, electricity, transport, communications, finance, and heavy industry. Private firms provided manufacturing efficiency, market competition, and rapid iteration. Foreign capital provided global orders, management standards, and technological connections. Local governments provided infrastructure, land organization, investment coordination, and policy competition.
But capital expansion also gradually produced new structural tensions. Real estate began to bind together local fiscal systems, household wealth, and the financial system. Platform companies accumulated new forms of power through traffic, data, payments, algorithms, and user gateways. Financial capital pursued leverage and arbitrage, and some capital moved away from the real economy. Basic social functions such as education, housing, and healthcare came under pressure from capitalized and financialized models. Some large platform companies ceased to be merely firms and began to become infrastructure gateways of the digital age.
At this point, the question of capital had shifted from “whether capital should be allowed to exist” to “what kind of power capital forms after it expands.” Once capital controls gateways, data, financial leverage, social services, and channels of public communication, it is no longer merely a factor of production. It becomes a force of social organization.
This shift laid the groundwork for the redrawing of boundaries after 2012.
After 2012: Capital’s Boundaries Are Redrawn
After 2012, the Communist Party of China’s understanding of capital changed further. Capital was still recognized as an important factor of production. The market was still emphasized as playing a decisive role in resource allocation. The private economy was still regarded as an important force in Chinese modernization. But the boundaries of capital’s operation were redrawn, especially in areas such as the platform economy, real estate, financial leverage, data security, the capitalization of education, common prosperity, national security, and technological self-reliance.
The core of this stage was not a renewed anti-capital turn. The more accurate judgment is this: capital was brought back under boundary management.
Capital can participate in development, but it cannot create systemic financial risk.
Capital can enter the platform economy, but it cannot control market gateways through traffic, algorithms, payments, data, and closed ecosystems.
Capital can participate in education, healthcare, housing, and other fields, but it cannot over-financialize basic social functions.
Capital can pursue profit, but it cannot move from the real economy into the virtual economy and drain resources away from manufacturing, technological innovation, and productive activity.
Capital can allocate resources globally, but it cannot create uncontrollable dependencies in critical data, critical infrastructure, critical technologies, and national security.
This is also the deeper meaning of “setting traffic lights for capital.” A green light does not mean the absence of regulation. A red light does not mean the denial of capital. A green light means the state encourages capital to enter fields that support technological innovation, industrial upgrading, advanced manufacturing, hard technology, job creation, supply-chain resilience, and international competitiveness. A red light means that capital cannot cross the bottom lines of financial security, social fairness, data security, antitrust governance, national security, and public interest.
China’s recent regulation of the platform economy, real estate financialization, after-school tutoring, financial holding companies, data security, and antitrust issues should all be understood within this framework. Regulation is not simply aimed at one type of ownership structure, nor is it merely a short-term policy fluctuation. It is the state redefining the social power of capital after capital accumulation entered a new stage.
China has not denied capital’s efficiency function. But it has become increasingly alert to capital’s power to dominate society.
This judgment is very important. A private manufacturing company that improves competitiveness through technology, management, supply chains, and global markets is usually seen as a positive force. A platform company that controls merchants, consumers, and financial gateways through algorithms, traffic, and data enters a different governance logic. A real estate company that develops housing normally is part of urbanization. A highly leveraged real estate-finance system that binds household wealth, local fiscal capacity, and bank balance sheets together becomes a systemic risk. A capital market that supports technology financing is part of the innovation system. A speculative cycle detached from real capability weakens the country’s long-term competitiveness.
Whether capital is allowed to expand does not depend only on ownership. It depends on the type of capability and power structure that capital forms.
The Current Reality: The Triangle of SOEs, Private Firms, and State Capacity
China’s real political-economic structure today cannot be captured by the phrase “the state advances, the private sector retreats.” Nor can it be explained as simple “marketization reversal.” A more accurate picture is a complex triangle formed by state-owned enterprises, private firms, and state capacity.
State-owned enterprises carry the bottom-layer system functions. In energy, power grids, railways, ports, communications, oil, natural gas, finance, defense industry, grain, major infrastructure, global engineering, and some strategic resource sectors, SOEs are not ordinary market actors. They are organizational nodes of national system capacity. They undertake long-term capital expenditure, public goods provision, strategic security, countercyclical stabilization, and the operation of critical infrastructure. In many fields, if everything were left to short-term capital return logic, it would be difficult to maintain very long-cycle investment and nationwide coordination.
Private firms carry efficiency, innovation, and market competition. China’s most dynamic sectors, including consumer electronics, new energy vehicles, power batteries, internet platforms, cross-border e-commerce, industrial automation, robotics, AI applications, biomedicine, supply-chain innovation, and large numbers of “specialized and sophisticated” enterprises, rely heavily on competitive pressure and entrepreneurship from private firms. China’s private economy is often summarized as contributing more than 50 percent of tax revenue, more than 60 percent of GDP, more than 70 percent of technological innovation outcomes, more than 80 percent of urban employment, and more than 90 percent of all enterprises. Whether in employment, innovation, or industrial iteration, private firms are an irreplaceable source of vitality in the Chinese economy.
The state is responsible for setting direction, boundaries, and risk bottom lines. Industrial policy, financial regulation, national security, data governance, antitrust enforcement, common prosperity, regional development, infrastructure investment, technological self-reliance, and the building of a unified national market are all continuously reshaping the operating space of capital. The state does not directly replace every corporate decision, but it decides which fields are encouraged, which fields are restricted, which risks cannot be allowed to spread, which foundational capabilities must be built, and which social bottom lines cannot be pierced by capital’s profit-seeking logic.
This is the core structure of China’s political economy: the state does not eliminate capital, and capital does not organize the state. The state continuously shapes the direction, boundaries, and uses of capital formation.
This structure also explains why China often sends policy signals that appear contradictory. On the one hand, China repeatedly emphasizes support for the private economy, introduces policies and laws to promote private-sector development, protects property rights, improves the business environment, and encourages private capital to enter major projects and technological innovation. On the other hand, China continues to strengthen antitrust governance, financial regulation, data governance, and real estate risk resolution. This is not simple policy oscillation. It is two sides of the same institutional logic: capital vitality must be released, and capital power must be constrained.
Conclusion: Capital Is Allowed to Develop, but It Must Be Repositioned
The Communist Party of China’s historical attitude toward capital cannot be simply summarized as suppression, liberalization, or renewed tightening. A more accurate description is that capital has been continuously repositioned in different historical stages. In the early years of the People’s Republic, capital was a transitional productive force that could be used. During the planned economy period, capital withdrew from the dominant position, and the state directly organized industrialization. After reform and opening, capital again became an important tool for releasing productive power, creating employment, attracting foreign investment, connecting with global markets, and driving local industrialization. After the rise of the platform economy, real estate financialization, data capital, and national security concerns, capital’s boundaries were redrawn again.
The core of this historical thread is very clear: capital can exist, develop, make money, and become an important source of vitality in the Chinese economy. But capital cannot become the highest principle that determines the direction of national development, controls public resources, reshapes the social order, and dominates critical infrastructure.
This is also the key to understanding contemporary Chinese economic policy. China, on the one hand, repeatedly emphasizes support for the private economy, protection of property rights, improvement of the business environment, entrepreneurship, and capital market development. On the other hand, it continues to strengthen financial regulation, platform governance, antitrust enforcement, data security, real estate deleveraging, and national security review. On the surface, these policies may appear to be in tension. When placed within the long-term relationship between the state and capital, they point to the same institutional logic: capital’s efficiency function must be released, and capital’s domination function must be constrained.
China needs private firms because without them there would not be enough employment, innovation, competition, market sensitivity, or speed of industrial iteration. China needs foreign capital because foreign capital still connects global markets, technical standards, management systems, and supply-chain networks. China needs capital markets because technological innovation, hard-tech investment, and corporate expansion require long-term capital and risk capital. China also needs state-owned enterprises because energy, electricity, communications, transport, finance, defense, grain, resources, and major infrastructure cannot be fully governed by short-term profit logic. China also needs strong regulation because once real estate, platforms, finance, education, healthcare, data, and algorithms are allowed to expand without limits, they can shift from productive tools into forces of social domination.
Therefore, the real question in China’s political economy has never been whether capital should exist. The real question is what capital should serve. Does it serve the real economy or asset prices? Industrial upgrading or financial arbitrage? Technological diffusion or platform monopoly? Long-term national capability or short-term wealth accumulation? Social stability or the transformation of housing, education, healthcare, and data into new rent machines?
This first essay has discussed China’s own historical evolution and contemporary reality. It shows that the Communist Party of China has not simply rejected capital. Instead, in different stages, it has repeatedly adjusted the position of capital, allowing capital to function within the framework of national development strategy, industrial organization, and social stability. This framework also explains why China can simultaneously have a powerful private manufacturing sector, an active platform economy, a large state-owned enterprise system, sustained industrial policy, and increasingly strict capital regulation.
But this question does not belong only to China. Once placed in a broader international comparison, a more fundamental question emerges: why are some countries able to organize capital and turn capital accumulation into industrialization, technological upgrading, export capacity, and national capability, while other countries are organized by capital, with state policy pulled by financial capital, real estate capital, resource capital, platform capital, or oligarchic interests?
That will be the subject of the second essay. The second essay, “Why Some States Can Organize Capital, While Others Are Organized by Capital,” will examine the experiences of the United States, India, East Asia, Europe, and Vietnam to discuss different combinations of capital and state capacity. The United States once organized capital through a unified market, infrastructure, war mobilization, financial systems, and industrial policy. But today, in more and more areas, capital is increasingly organizing the state in reverse. India has long had entrepreneurs, markets, and technical talent, but in many periods it has struggled to form sufficiently strong capital discipline. The success of East Asian economies came largely from the state’s ability to give capital resources while also imposing constraints on capital. Europe’s challenge lies in the increasing difficulty of coordination among capital, industrial policy, energy systems, and state capacity. Vietnam represents a new generation of late-industrializing countries trying to organize capital amid the restructuring of global supply chains.
The first essay explores China’s specificity: capital has always been redefined within the framework of state capacity, industrial upgrading, and social stability.
The second essay will ask a further question: why this capacity to organize capital is not something every state possesses.
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excellent synthesis of the role of private capital in China, which is much more nuanced than the simplistic narrative found in most western media and academic circles, even the relatively unbiased and objective ones.
private capital in China is a supplmentary part of the total capital deployed in the country where state-owned capital provides the foundational public goods and infrastruture (such as power grid, healthcare, education, telecom, and banking) and private capital provides the innovation and commercialization of competitive industries. Both private and public capital works under the long-term strategic guidance and regulation of the state.
at a fundamental level, private capital can make money and generate a healthy return to owners. But private capital is not allowed to capture political power for its benefit. Capitalists are allowed but not "capitalism" which is defined as a governance system that overtly benefits the capitalists at the expense of the general population. This is why China is on a fundamentally different trajectory from the west.
It was interesting to read about how capital has been re imagined periodically.