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.
I agree with Hua Bin that this establishes what both standard narratives miss: China's relationship to capital follows a consistent logic across phases, not a pendulum between suppression and liberalisation (at least after the fact). A prior question is what made that posture structurally available. I think Korea is another example that illustrates aspects of the mechanism.
Despite comparable industrial ambition in the 1950s and 60s, Park Chung-hee could impose performance conditions on the chaebol in ways Nehru's India demonstrably could not. Export targets, debt-equity ratios, sector allocation.
The structural difference was not state capacity in the abstract. The US-backed Korean land reforms of 1949–52 dismantled the landlord class as a rival power centre before Korea's industrial capital became large. When the chaebol were built, they were built on state credit, structurally dependent on the state rather than the reverse. The state organised capital before capital had time to organise anything else. Korea shows the mechanism: land reform eliminated rival claimants, state credit placed the chaebol in structural dependence, and the performance conditions Park imposed were enforceable precisely because the authority relationship ran in one direction.
States that consolidate political authority before the appearance of large-scale capital formation in the economy enter the development process as principals. Where capital formation outpaces political consolidation, that structural position never exists.
India ran the other way. Industrial houses like Tata and Birla were large and politically embedded before independence. The abolition of zamindari was uneven and contested; rather than eliminating agrarian capital as a rival power centre before industrial capital emerged, post-independence politics incorporated it. Capital formation had preceded political consolidation, and Nehru's planning apparatus was negotiating with an authority structure it had never controlled rather than directing one it had built.
Vietnam is the contemporary test case, and the sequencing argument gets harder there. Its industrialisation runs through Samsung, Foxconn, and LG rather than domestically funded firms on state credit. A state can set conditions for market access, but whether that substitutes for the structural leverage that comes from controlling capital allocation to the firm itself is less clear than in the case of Korea. An interesting test case?
Thank you Stephen! This is an excellent point, very deep insights, and I agree with the Korea comparison. It helps clarify that the issue is not “state capacity” in the abstract, but the prior social structure that determines whether the state can actually discipline capital.
Korea’s land reform is crucial here. By weakening the landlord class before industrial capital became fully consolidated, the state changed the balance of power before the chaebol became too strong. Later, when the state supplied credit, foreign exchange access, industrial licenses, and sectoral direction, capital remained structurally dependent on state-organized resources. That is why export targets, debt-equity controls, sector allocation, and performance discipline could be enforced.
This is also where Korea differs sharply from India. India had planning, industrial ambition, and state intervention, but it did not go through the same depth of social restructuring that would have weakened entrenched landed and commercial power centers. Protection could therefore become entitlement more easily, while discipline was harder to impose.
So I think your formulation is exactly right: Korea shows that the state can organize capital only when capital has not already organized the social and political terrain around itself. Land reform, state credit, and export discipline were not separate policies. They formed one authority relationship.
Your concept of apex commitment is very close to what I have been thinking about as the state’s ability to discipline and organize capital. The East Asian cases show that industrial policy only works when the governing coalition can impose real performance discipline on its own allies. China’s 1978 turn may be the largest case of this logic, but its later transformation also required something more: local state competition, industrial-system density, infrastructure finance, and the continuous conversion of market opening into production capacity.
Thankyou Leon for this comprehensive structural analysis. I think your characterisation of red lines that capital cannot cross is spot on. Another red line I would argue regards corruption whether in private, SOEs or state institutions. Recent convictions of both high profile and lower level individuals across the spectrum serves as a potent, visible red light in terms of managing the economy.
Thank you — I think that is exactly right. Corruption is another crucial red line because it changes the relationship between capital and state power from organization into capture.
If capital uses political access, SOE networks, local authority, or regulatory discretion to obtain rents, then it is no longer being disciplined into capability formation. It is converting public power into private advantage. That is why anti-corruption is not only a moral or legal campaign, but also an economic governance mechanism.
In that sense, corruption control is part of the same broader framework: capital can be used, encouraged, and mobilized, but it cannot be allowed to capture the state, distort resource allocation, or turn public authority into a private rent machine.
Most revealing insight. From a historical perspective, it's another instance of whether economic and political power are concentrated or not in the same hands.
But that would be the topic for a different (although related) post.
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.
I agree with Hua Bin that this establishes what both standard narratives miss: China's relationship to capital follows a consistent logic across phases, not a pendulum between suppression and liberalisation (at least after the fact). A prior question is what made that posture structurally available. I think Korea is another example that illustrates aspects of the mechanism.
Despite comparable industrial ambition in the 1950s and 60s, Park Chung-hee could impose performance conditions on the chaebol in ways Nehru's India demonstrably could not. Export targets, debt-equity ratios, sector allocation.
The structural difference was not state capacity in the abstract. The US-backed Korean land reforms of 1949–52 dismantled the landlord class as a rival power centre before Korea's industrial capital became large. When the chaebol were built, they were built on state credit, structurally dependent on the state rather than the reverse. The state organised capital before capital had time to organise anything else. Korea shows the mechanism: land reform eliminated rival claimants, state credit placed the chaebol in structural dependence, and the performance conditions Park imposed were enforceable precisely because the authority relationship ran in one direction.
States that consolidate political authority before the appearance of large-scale capital formation in the economy enter the development process as principals. Where capital formation outpaces political consolidation, that structural position never exists.
India ran the other way. Industrial houses like Tata and Birla were large and politically embedded before independence. The abolition of zamindari was uneven and contested; rather than eliminating agrarian capital as a rival power centre before industrial capital emerged, post-independence politics incorporated it. Capital formation had preceded political consolidation, and Nehru's planning apparatus was negotiating with an authority structure it had never controlled rather than directing one it had built.
Vietnam is the contemporary test case, and the sequencing argument gets harder there. Its industrialisation runs through Samsung, Foxconn, and LG rather than domestically funded firms on state credit. A state can set conditions for market access, but whether that substitutes for the structural leverage that comes from controlling capital allocation to the firm itself is less clear than in the case of Korea. An interesting test case?
Thank you Stephen! This is an excellent point, very deep insights, and I agree with the Korea comparison. It helps clarify that the issue is not “state capacity” in the abstract, but the prior social structure that determines whether the state can actually discipline capital.
Korea’s land reform is crucial here. By weakening the landlord class before industrial capital became fully consolidated, the state changed the balance of power before the chaebol became too strong. Later, when the state supplied credit, foreign exchange access, industrial licenses, and sectoral direction, capital remained structurally dependent on state-organized resources. That is why export targets, debt-equity controls, sector allocation, and performance discipline could be enforced.
This is also where Korea differs sharply from India. India had planning, industrial ambition, and state intervention, but it did not go through the same depth of social restructuring that would have weakened entrenched landed and commercial power centers. Protection could therefore become entitlement more easily, while discipline was harder to impose.
So I think your formulation is exactly right: Korea shows that the state can organize capital only when capital has not already organized the social and political terrain around itself. Land reform, state credit, and export discipline were not separate policies. They formed one authority relationship.
Thanks. I am working through some of these issues at the moment. See https://hiddenrules.substack.com/ for more details.
Great! I’ve subscribed you!
Your concept of apex commitment is very close to what I have been thinking about as the state’s ability to discipline and organize capital. The East Asian cases show that industrial policy only works when the governing coalition can impose real performance discipline on its own allies. China’s 1978 turn may be the largest case of this logic, but its later transformation also required something more: local state competition, industrial-system density, infrastructure finance, and the continuous conversion of market opening into production capacity.
政府，资本和人民，这三角关系，要处理好。
美国：政府为资本撑腰，将人民当成选票。
中国：政府站在中间位置，利用资本来造福民生，将人民当成人。
中国有句老话：君为舟民为水，水能载舟，亦能覆舟。
Well said!
Thankyou Leon for this comprehensive structural analysis. I think your characterisation of red lines that capital cannot cross is spot on. Another red line I would argue regards corruption whether in private, SOEs or state institutions. Recent convictions of both high profile and lower level individuals across the spectrum serves as a potent, visible red light in terms of managing the economy.
Thank you — I think that is exactly right. Corruption is another crucial red line because it changes the relationship between capital and state power from organization into capture.
If capital uses political access, SOE networks, local authority, or regulatory discretion to obtain rents, then it is no longer being disciplined into capability formation. It is converting public power into private advantage. That is why anti-corruption is not only a moral or legal campaign, but also an economic governance mechanism.
In that sense, corruption control is part of the same broader framework: capital can be used, encouraged, and mobilized, but it cannot be allowed to capture the state, distort resource allocation, or turn public authority into a private rent machine.
If you are interested in China's anti-corruption, here is my post on this topics: https://leonliao.substack.com/p/anti-corruption-official-accountability?r=731anr&utm_medium=ios
Most revealing insight. From a historical perspective, it's another instance of whether economic and political power are concentrated or not in the same hands.
But that would be the topic for a different (although related) post.
Well said. The separation of economic power and political power is a topic related to, though broader, that I will discuss in another essay later.