Rule by Market: The Chinese State in Factor Markets

Political economy on China and beyond generally has been premised on a trade-off between state and market power. In the context of China’s reforms, markets and market mechanisms were hypothesized to replace state power in allocating important economic resources. Yet, even as market mechanisms have been introduced in important realms, the state appears to retain power over supply and demand, and, by extension, prices. This paper examines the introduction, and eventual adjustment and constraint, of markets in two important arenas: land and equity markets. Through process tracing and by analyzing a large body of policy documents from various levels of government in both arenas, I uncover a cycle by which the Chinese state embraced market mechanisms to address problems of misallocation, met uncomfortable outcomes of instability and “bubble” behavior during partial liberalization, and reconfigured state control over supply and demand of land and capital while retaining market mechanisms to facilitate competition but not set prices. In both arenas, the Chinese state “rules by market,” by which market mechanisms facilitate, rather than replace, state control over allocation of resources. Rule by market is characterized by authoritarian responses (including populist crackdowns and the use of the state’s coercive apparatus) to respond to market instability as well as institutional reconfigurations involving “red lines” to structure exchange, the setting of indirect price controls, and the rise of novel institutions to enforce these. Rule by market helps make sense of a number of empirical puzzles in China’s political economy, such as bubbles that never seem to pop and cycles of liberalization and crackdown, and suggests amendments to several ideas about how the CCP has managed markets with monopolized political power.