The economy jointly operated by state and private capital is of a state-capitalist nature. Whenever necessary and possible, private capital shall be encouraged to develop in the direction of state capitalism, in such ways as processing for state-owned enterprises and exploiting state-owned resources in the form of concessions.
As early as 1949, the authorities began to draw private businesses into a close partnership with the government by establishing "joint public-private enterprises." This new organizational model essentially created a state-controlled partnership, marking a decisive move towards complete socialization. While initially introduced gradually, this campaign eventually became the primary method for bringing all private enterprises under state ownership. The regulations governing these new enterprises clearly established the government as the dominant partner.
Elementary and advanced state capitalism...
State capitalism developed in two main phases: elementary and advanced.
Elementary state capitalism represented a "lower form" of state control, primarily focusing on the circulation of goods. In this stage, the state influenced the private sector by placing orders and purchasing products. Private companies retained management of their operations, but their transactions with the state were contract-based, without direct state involvement in day-to-day enterprise management.
In industry, this "lower form" meant the state either provided raw materials to private enterprises for processing into finished goods or placed direct orders for goods. Both methods operated within a "unified purchase and distribution system" organized by the state. After 1953, nearly all industrial trade involved fulfilling government orders. Processing of goods involved state entities supplying raw materials or semi-finished products to private companies, with contracts ensuring the return of finished products by a specified date. Payments covered wages, taxes, reasonable profits, and other expenses. Placement of orders meant state entities ordered specific goods from private companies, detailing quality, quantity, delivery dates, and prices, allowing for reasonable profits. The "unified purchase" aspect meant the state bought certain goods exclusively from private enterprises through orders, preventing their sale on the open market, although products made from state-provided raw materials could be sold openly.
Advanced state capitalism, a "higher form," involved direct state control over a firm's production processes and direct participation in enterprise management. This led to mixed state-private enterprises, also known as Joint state-private enterprises. In these entities, capitalist assets were converted into private shares, while government investments became state shares. This arrangement resulted in the joint ownership of the means of production by both capitalists and the state, effectively eliminating purely private enterprises.
The Chinese government gradually integrated private entrepreneurs into the state-controlled economy through a three-step process: utilization, restriction, and transformation. Utilization (1949-1952)
This initial phase involved offering preferential measures to the private sector to encourage production and economic activity. The state boosted orders to private factories for manufacturing and processing, and it purchased their products, enabling entrepreneurs to continue and expand their businesses profitably. Private merchants were also permitted to engage in some import and export, and they were incentivized by price differences to transport goods for sale, which stimulated market transactions. The state bank provided loans to capitalists, boosting their confidence in investment. Additionally, commodity taxes were reduced, lowering costs for merchants.
These policies led to a significant recovery in private factories. Production surged, with flour increasing by 54%, rice by 290%, cotton yarn by 130%, and cotton cloth by 230%. The total output value from private factory processing, manufacturing, and state purchases reached 2.1 billion yuan, a 2.7-fold increase from 1949's 810 million yuan. Taxes collected from private industry and commerce also saw substantial increases in late 1950, rising by 90% and 80% respectively compared to the first quarter.
Restriction (1952-1953)
Despite the positive economic outcomes of the "utilization" phase, a period of "restriction" was implemented simultaneously. In December 30, 1950, Interim Regulations on Private Enterprises were issued, mandating that private businesses submit their production and sales plans for state approval. These regulations also stipulated fixed proportions for the allocation of private business earnings, covering dividends, welfare funds, taxes, and reserve funds.
Further tightening controls, the "three-antis" campaign in August 1951 aimed to reduce the connections between private entrepreneurs and officials. This was followed by the "five-antis" campaign in 1952, which significantly curtailed the private economy's scope. While ostensibly targeting "imperialist, feudal, bureaucratic 'compradors'," the campaigns' true purpose was to curb the growth of the private sector and confiscate its profits. Private entrepreneurs were coerced into "self-confession" and "self-criticism," publicly acknowledging workers as their "masters."
By 1953, the effects of these campaigns were evident: the working capital of private factories and firms decreased from 232 to 182. In the wholesale trade, the private share plummeted from 76.1% in 1950 to just 30.3% in 1953. Conversely, state commerce's total retail sales surged by 306%, and cooperatives' by 529%, between 1950 and 1952. In retail, the private sector's share dropped from 85% in 1950 to 49.9% in 1953, while state commerce's share in wholesale trade increased from 23.9% in 1950 to 63.8% in 1952. These figures demonstrate that the restriction process largely achieved its goals.
Transformation (1954-1957)
The final stage was "transformation," which began in September 6, 1954 with the GAC promulgation of Provisional Regulations for Joint State-Private Industrial Enterprises. These regulations designated "mixed state-private enterprises" as the "advanced form of state capitalism," requiring private businesses to integrate with state investments or other mixed enterprises under the joint direction of capitalists and state-appointed functionaries.
From this point, state capital investment in these enterprises became increasingly common, with private assets converted into private shares. The government directly influenced production processes by assigning representatives to participate in and control management. This effectively transformed private capitalists into de facto state-appointed employees. By the end of 1954, there were over 1,700 joint state-private industrial enterprises, employing more than 5.3 million workers (a significant increase from 193 enterprises and about 0.1 million workers in 1949). These enterprises generated an annual output value exceeding 5 billion yuan.
In its early form, state control over commerce aimed to rein in the private sector through a system of state-managed distribution and a surrogate market. Private retailers essentially became agents for the state, which dictated the goods they sold and their operational terms. The compensation for these private businesses came in the form of commissions or handling charges, all set by state enterprises.
The unified market meant that private factories had to sell their entire output to the state within a set timeframe, based on contracts with state enterprises.
The distribution market involved state commerce delegating the sale of its products to private retail shops. The state enterprises determined product prices, and private shops were required to pay cash upon receiving the goods. Their profit came from the difference between the wholesale and retail prices. Critically, these retail shops could no longer buy commodities directly from the open market, leading to nearly complete state control over the finished products market.
The surrogate market operated similarly, with private retailers acting as agents. They had to provide a security deposit to the state before selling the state-supplied products. Prices were state-fixed, and the dealers' commission was predetermined. Like in the distribution market, retailers were barred from purchasing products directly from the open market. See for more details on domestic commerce Article 37.
From 1949 onwards, the Chinese authorities began integrating private businesses into the state economy through "joint public-private enterprises." This new organizational model was essentially a partnership with the state, marking a definitive move toward complete socialization. Initially, the push for these joint ventures was gradual, but it eventually became the primary method for bringing all private enterprises under state ownership.
Under this new structure, the government was the dominant partner. Private businessmen, while contributing all their assets, did not retain direct control. Instead, they participated in management as salaried employees, with the government primarily seeking their technical and managerial expertise. Initially, private owners received a percentage of annual profits as compensation.
Fig. 31.1 Distribution of private and public-private enterprises
Richman (1969). Page 899 figures are of the end of the year The CCP initially emphasized the need for public support and voluntary agreement from private owners to join these enterprises. However, subtle pressures, such as offers of cheaper raw materials and increased business opportunities, likely influenced private firms. The Chinese press often reported positive outcomes after conversion; for example, a Shanghai foundry claimed a 12% cost reduction and 18% output increase, while nine woolen knitting shops reported a 60% increase in turnover. Despite these reported successes, only about 1,000 joint firms had been established by 1954. These were predominantly larger industrial companies, which the authorities stated accounted for 13.3% of the combined industrial output of capitalist and joint enterprises.
Fig. 31.2 Socialist transformation in Shanghai and Guangzhou
Frazier (2004). Page 134
Between 1953 and 1956, Shanghai underwent a significant shift in its industrial landscape, moving from a predominantly private-sector model to one dominated by jointly owned and state-controlled enterprises. In 1953, 29,485 private industrial enterprises were the backbone of Shanghai's industry, responsible for a remarkable 99% of the city's total industrial output. However, by 1956, this had dramatically changed. These private businesses were consolidated and transformed into 16,768 jointly owned enterprises, which, by then, produced 66.5% of Shanghai's industrial output value.
During the same period, the number of state-owned industrial enterprises in Shanghai saw a modest increase, growing from 246 in 1953 to 279 in 1956. Despite their smaller number, these state-owned entities contributed significantly, accounting for just over 33% of Shanghai's industrial output value by 1956. This arrangement provided a stable income and reduced the operational responsibilities of private owners. Notably, some entrepreneurs actively sought joint venture status, recognizing the benefits of state support in areas such as supply chain management and labor relations.
Cliver (2015). "Within a year, nineteen Shanghai silk-weaving factories had applied for joint state-private status, but at the time the government approved none of these " Page 712 [↩][Cite]
09-07-1953 Mao Zedong On state capitalism 
