China’s Capitalists under Reform

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Abstract Mutual alignment of interests between the CCP, low-level bureaucrats, and the private sector characterized the Chinese political economy for the first two decades of the reforms (1978–98). The era was characterized by financial exclusion but practical embrace of the private sector, which relied on self-financing mechanisms. Toward the late 1990s and in the early 2000s, discipline in both the public and private financial systems broke down. Tax recentralization disconnected local officials from the firms in their jurisdictions, and land finance introduced an alternative source of investment and self-enrichment for local officials. In the financial system, institutional reforms to expand equity markets and introduce a bureaucratic—as opposed to a party-driven—regulatory system to govern banks and other nonbank financial institutions diminished CCP political control but did not replace it with either market discipline or rule of law. The chapter also discusses how capitalists adapted to an uncertain and distrustful political relationship with the regime.