During her visit to China in 1991, former British Prime Minister Margaret Thatcher told President Jiang Zemin that socialism was incompatible with a market economy. She also said that capitalism and privatization were preconditions for a market economy. Her view was representative of the opinion in the capitalist world, but was not accepted by Jiang. One year later, Jiang proclaimed at the 14th National Congress of the CPC in 1992 that the goal of China's economic restructuring was to establish a socialist market economic system. It is astonishing to many people that China's socialist market economy is so vibrant and has produced important achievements. Many people may wonder how the CPC could integrate socialism with a market economy.

Economists have argued over the relationship between the planned and market economies for over a century. The Soviet Union was the first country where a planned economy model was formed. Shortly after the CPC came to power, China established a planned economy, copying the Soviet Union by prioritizing heavy industry in the development strategy.

With the incessantly expanding scale of economic construction and continuous increase in the quantity of products and the demands of the people, the drawbacks of China's planned economic system gradually became more and more obvious. As a result of the rigid planned economic system, the efficiency of socioeconomic development was quite low, and people found it increasingly hard to make ends meet. Everything was in short supply. The phenomenon was called a shortage economy by Janos Kornai, a Hungarian economist. Of 1 billion Chinese people, 250 million lived under the poverty line in 1978.

The actual situation in China and the difficulties of the Soviet Union sent a strong signal to the CPC—it would not do any longer to walk on the path of the planned economy.

The only way out was to reform. Late Chinese leader Deng Xiaoping proposed starting the reform by expanding the rights of enterprises to make their own decisions. Economists also became active. To cope with the defects in the planned economy, which restricted the role of the market, they urged that it was necessary to observe the law of value and give the role of the market full play in economic construction.

The large number of unemployed young people in cities began seeking their own means of livelihood, plunging into the market with government permission. Privately run businesses sprang up and developed rapidly. China also made headway in implementing its opening-up policy. Practice showed that the economy developed much faster in areas where the role of the market was given full play, but slowly elsewhere. Under such circumstances the CPC was determined to promote economic restructuring. The traditional idea of contrasting a planned economy with a commodity economy was abandoned on October 20, 1984. Three years later it was proposed at the 13th National Congress of the CPC that China's economy was a planned commodity economy on the basis of public ownership; and the economic operation pattern was defined as "the state guides the market, and the market guides enterprises," which for the first time clarified that the roles of planning and the market could be combined in society at large.

Opinion was divided on whether market-oriented reforms should continue in China after the Soviet Union and the socialist countries in Eastern Europe all collapsed. Whatever people intended to do, it was imperative to ask first whether it was "capitalist" or "socialist." As a result, people were afraid and unable to initiate anything. China's reform process slowed down. In 1990 economic development slumped.

At this critical moment, on December 24, 1990, during a talk with other leaders, Deng pointed out: "We must understand that the difference between capitalism and socialism is not a market economy as opposed to a planned economy. If we did not have a market economy, we would have no access to information from other countries and would have to reconcile ourselves to lagging behind."

Deng played the role of "Mr. Key" in exploring the development of the market economy with Chinese characteristics. "The reform and the opening-up policy have been successful not because we relied on books, but because we relied on practice and sought truth from facts. Many of the good ideas in rural reform came from people at the grassroots. We studied them, and raised them to the level of guidelines for the whole country," Deng said.

On January 17, 1992, only 20 days after the disintegration of the Soviet Union, 88-year-old Deng began a historic trip to south China. He started his trip with heavy concern and a sense of urgency about the carrying out of China's reform and opening-up policy. On his inspection tour, Deng pointed out that "a market economy is not capitalism, while a planned economy is not identical with socialism: Planning and market forces are both means of controlling economic activity." The CPC came to realize that to avoid repeating the failures of the Soviet Union and East European countries, it was imperative for China to continue market-oriented reforms and enable the people to benefit from reforms so as to win their support.

According to Time magazine, the all-round economic reform advocated by Deng emancipated the productive forces of China's 1 billion people. The reform launched by Deng has greatly changed the daily life of the Chinese people, and foreigners visiting China a few years after their previous visit often found it hard to believe the changes.

What goal should China set for its economic restructuring? Deng did not describe the goal explicitly. This was left to his successor, Jiang Zemin, who was elected the top leader of the CPC in 1989.

On the basis of a series of investigations and research probes, it was stated clearly at the 14th National Congress of the CPC, held in October 1992, that the goal of China's economic restructuring was to establish a socialist market economy system. In 1993, "implementing a socialist market economy" was made part of the Constitution of the PRC, and a political move was turned into a legal stipulation.

Nobody could have imagined that China's acceptance into the WTO would be delayed as long as six years just because of the term "market economy." In the 1980s, China proclaimed to the world that it would implement a "commodity economy system" and during negotiations for China's entry into the General Agreement on Tariffs and Trade, the WTO's predecessor, foreigners were struggling to figure out the meaning of the term. Representatives from the United States expressed their views frankly during the examination of China's economic and trade systems, saying they knew only two economic systems in the world—a planned economy and a market economy—and they had never heard of a "commodity economy." The negotiating representatives from the West finally posed the question: "Is China implementing a market economy?" Due to China's domestic political atmosphere then, none of China's negotiating representatives dared to admit it!

It was not until 1992, when it was clearly stated at the 14th National Congress of the CPC that China would establish a socialist market economy system, that the Chinese delegation told the representatives from other countries that China was also implementing a market economy system but under the overall practice of socialism. The negotiating process determining China's accession to the WTO, which had been suspended, was not only resumed, but also moved on to the substantive stage of market access.

The reform goal of building a socialist market economy caused confusion among Westerners because only five main market economic patterns were recognized in the world, including the free market economic pattern of the United States, planned market economic pattern in France, social market economic pattern in Germany, welfare national market economic pattern in Sweden, and government-oriented market economic pattern in Japan. The socialist market economy does not fall neatly into any of the above-mentioned categories.

Some people raised doubts about the term "socialist market economy," asking whether there is any difference between capitalism and socialism when it comes to a market economy. Just as Jiang said, the attribute "socialist" points out the goal and the nature of China's implementation of a market economy. The market economy in China is closely linked with the basic socialist economic system, whose principles include public ownership as its foundation and which features the coexistence of a variety of ownership models. According to American scholar Robert Lawrence Kuhn, "The 'socialist' modifier does in fact give a somewhat accurate description of China's current economic policy, even if only to differentiate it from Western-style capitalism." Out of consideration for stability, the Chinese want to maintain central control to some extent to force a narrowing of the increasingly widening gap between the rich and the poor, which is the inevitable product of liberal market capitalism.

By employing Eastern wisdom, respecting reality, and forging ahead with bold innovations, China has expanded the role of the market without ignoring the determining values of planning. The magic power of the market was brought into full play under the command of the CPC.

The market propelled huge, populous and largely backward China from being an underdeveloped country to a rapidly developing one, and at a speed never before witnessed in the world. In 2010, China became the country with the second largest fiscal revenue, exceeded only by the United States. China's total output increased sharply, and production of key main agricultural produce such as grain and cotton and over 100 industrial products rank first in the world. The UN and the World Bank have said two thirds of the achievement in human poverty relief over the past 25 years was attributable to China.

While many countries met with serious setbacks as a result of the financial crisis sweeping across the world since 2008, China's socialist market economy was admired by many countries for its obvious advantages. It displayed considerable power of integration when adjusted to respond to the financial crisis, pooling China's energies and deploying its national strengths in a short period of time.

(Source: Chapter Seven from Why and How the CPC Works in China by New World Press)

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