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Traditional Chinese institutions profoundly determined the country's path to modernization, setting the starting point and limits for transitioning from an agrarian society to a modern industrial one. While these institutions had secured long-term stability and prosperity for the agrarian society, they effectively blocked the institutional innovation necessary for a modern economy.
The 19th-century crisis represented a complete breakdown of this traditional institutional structure under the pressure of industrial forces. Consequently, modernization, centered on industrialization, became the only viable solution. This required the crucial step of rural institutional innovation. The economies of late Qing and Republican China prioritized light industry over heavy industry. Before 1949, manufacturing was dominated by small-scale handicraft production—such as tea, silk, and textiles—which represented the only viable form of light industry in the absence of a domestic heavy industrial base. When “modern industry” began to emerge in the late nineteenth and early twentieth centuries, it remained overwhelmingly concentrated in light industry, as chronic capital shortages prevented the development of heavy industry. At the same time, Chinese-owned light industrial enterprises were constrained by limited access to essential inputs such as fuel, machinery, and modern transportation, all of which depended on heavy industry. Contrary to classical expectations, market forces did not channel capital effectively into these sectors; instead, integration into the global economy often exposed them to destructive competitive pressures.
In theory, as articulated by Rostow, late-developing economies could industrialize by specializing in goods of comparative advantage to generate surplus capital. In practice, this strategy had already been pursued by the Chinese state following 1842, but it failed to produce sustained economic growth. Rather, it contributed to mounting indebtedness and deepening subordination to Western powers. Reformers from the Self-Strengthening Movement onward thus concluded that national survival required state control over key sectors—especially mining, steel production, and modern transportation—rather than reliance on externally driven market mechanisms.
China's modernization journey tightly linked rural institutional reform, modern state-building, and industrialization. Early 20th-century Chinese governments failed to either create industrial institutions or protect traditional rural ones from competition. Thus, the top priority became winning the support of the massive peasantry through rural reform to build a strong, independent state capable of driving industrialization.
This necessity shaped the direction of rural change, highlighted the vital roles of peasants and agriculture in the industrial program, and made the state-peasantry relationship a decisive factor in the entire modernization process. It was within this historical context that the CCP relationship with the peasants was formed, setting the stage for the PRC's subsequent rural institutional reforms.
The CCP has 2 economic objectives, the rapid industrialization based on planning and socialization of enterprises and people. To achieve a socialist state, the CCP has to capture the power of the ruling propertied classes and to eliminate the semi-colonial and semi-feudal basis of the country. Besides the economy has to become self-sufficient and self-reliant and foreign control has to be destroyed. The economic objective is to raise the peasants’ (and workers’) efficiency to increase the labour productivity to be able to finance the industrialization.
The CCP faced several major challenges: First of all, to establish and consolidate the central administration (Chapter 2), second take control over the hyperinflation, reconstruction and development of the economy, to finish the land reform, to solve unemployment, to stop the migration to urban areas (Article 5) and last to begin with the transition to a socialist production method. The CCP’s takeover operations extended well beyond institutions directly administered by the previous regime. Cadres were explicitly instructed that upon arriving in Shanghai they were to assume control not only of all GMD administrative organs, but also of factories, schools, financial and commercial systems, as well as media, cultural, and educational institutions. This directive makes clear that the takeover program was conceived as a comprehensive transformation of urban society rather than a narrowly defined transfer of governmental authority. See for problems with recruiting cadres Part 7. The Common Program describes the five sectors of the future economy. The government controls the state sector which includes the big industries, the mines, public enterprises and utilities (Article 28 ). The cooperative sector is a semi-socialist sector (Article 29 ). The third sector is the small private enterprise sector which consists of individual farms, handicrafts, and other small business units, which will gradually be transformed from individual to collective segment. (Article 30 ) The ‘national capitalists’ are the fourth sector. (Article 30 ) The state capitalist sector consists of joint state-private enterprises.(Article 35 ) The state sector has to fulfil the role of catalyst in the national economy to prevent the revival of the private sector. The state enterprises in China were first classified into three categories:
(1) those under the direct control of the central government,
(2) those owned by the central government but temporarily entrusted to local governments or other agencies for administration; and
(3) those assigned for control by the local governments or other agencies. Many of the modern sectors of industry were in the hands of foreigners and were concentrated in the neighbourhood of ports and coastal cities. Overall, the economy can be characterized as small, highly labour-intensive. To develop the state sector confiscation and nationalization of foreign controlled industries and enterprises owned by Chinese magnates, related to the GMD regime, was the primary objective.

From a strictly Marxist perspective, the material conditions of China in 1949 presented a paradox. The country’s social formation was marked by a contradictory amalgamation of modes of production: on the one hand, large swathes of the countryside remained mired in feudal relations—with agriculture organized along pre-capitalist lines and, in some regions like western Sichuan, even retaining vestiges of slavery into the 1950s. On the other, China’s urban centres, particularly Shanghai and Manchuria, hosted a nascent but undeniable capitalist sector, characterized by modern industry and wage labour.
According to classical Marxist theory, the historical necessity of capitalism as a transitional stage was clear: the forces of production had to be developed, the proletariat expanded, and the contradictions of capitalism sharpened before the possibility of socialist revolution could arise. In this sense, the “spirit of Marx” would have dictated that China first complete its bourgeois revolution—modernizing its technology, accumulating capital, and creating a free labor market—before any meaningful move toward socialism could be contemplated.
Yet, for the CCP, the prospect of a prolonged capitalist transition was politically untenable. The Republican era had already demonstrated capitalism’s inability to deliver equitable development; its inherent tendency to concentrate wealth and power in the hands of landlords and capitalists was fundamentally at odds with the revolutionary promises of the CCP. Moreover, the Party’s legitimacy rested on its commitment to land reform and the abolition of private property—concessions to capitalism risked betraying the very classes whose support had secured the Revolution.
Thus, the CCP found itself in a dialectical bind: while Marxist orthodoxy prescribed capitalism as a necessary precursor to socialism, the concrete conditions of China—and the political imperatives of the Revolution—demanded an immediate leap toward socialist construction. The Party’s rejection of Marx’s historical teleology was not a theoretical aberration, but a pragmatic response to the contradictions of China’s semi-feudal, semi-colonial reality.
In 1949, the CCP followed a dual policy “the New Democracy” in which alliance and struggle with the national bourgeoisie were needed to develop the economy. In fact, adopting the Soviet Union NEP model of 1921–1928. The improvement of the worker’s livelihood may not interfere with the proper development of the “capitalist” economy. The land reform shall not hamper the growth of agrarian production.

The Common Program describes in articles 26-31 the economic strategy which is based on 5 sectors of ownership.
Article 26 Foundation of the economy.
Article 28 State-owned sector, all enterprises vital for the economy and people’s livelihood.
Article 29 Co-operative sector, semi-socialist and receiving preferential treatment.
Article 30 Private sector, which is beneficial to the national welfare, is supported
Article 31 State and private sector, private capital shall be encouraged to develop in the direction of state capitalism.
The other articles deal with
Article 27 Agriculture, land reform has priority.
Article 35 Industry, the main large-scale industries are to be confiscated and nationalised and to be runned by industrial ministries set up under the GAC.
Article 36 instructs the restauration and growth of the national network of roads and railways and the expansion of civic aviation. Postal, telegraphic and telephone services shall be improved and developed.
Article 39 stipulates the abolishment of private banks, the creation of the People’s Bank of China, a ban on circulation of gold, silver and foreign currencies, and the introduction of the Renminbi.
Article 40 Fiscal policy targets the urban areas and restricts the government’s spending.

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