Strange Jigsaw Puzzle

Since the 2010s, the sharp contraction of exports following the international financial crisis has altered the external conditions that formerly sustained China’s high-speed growth. At the same time, China has also shown signs of financialization, manifested in a slowdown in productive accumulation, an expansion of financial activity, and the growing visibility of financial risk. The top leadership of the Communist Party of China (CPC) has recognized the necessity, within the framework of the socialist market economy, of regulating and guiding the behavior of capital under the Party’s leadership. Since the Eighteenth National Congress of the Communist Party of China, President Xi Jinping has significantly strengthened the Party’s leadership—especially that of the Party Central Committee—in economic and financial work, reaffirmed the fundamental principle that finance must serve the real economy, and intensified anti-corruption efforts in the financial sector. All this reflects the Party’s determination to address at the root such problems as financialization and the disorderly expansion of capital, and to advance the construction of a socialist economic system with Chinese characteristics.

The Structural Transformation of Contemporary Capitalism and Dependent Financialization in the Global South

The stagflation crisis of the 1970s brought capitalism’s postwar boom to a definitive end. Following a prolonged period of structural adjustment, capitalism entered a new stage, fundamentally different from the postwar golden age, in which monopoly-finance capital became the dominant force. The most salient feature of this stage is the decoupling of financial expansion from the development of the real economy. The surge in financial activity across the whole society—including the financial sector, nonfinancial corporations, and households—helped to alleviate the pressures of economic stagnation and, through wealth effects, transformed asset-price inflation into new sources of demand. But this was only a false prosperity. The disproportionate expansion of financial bubbles left the economy perpetually exposed to the risk of debt deflation, which was also the underlying cause of the 2007–2009 global financial crisis. Even after the crisis, however, capitalist economies did not return to the postwar pattern of accumulation led by industrial capital. Instead, the deeply entrenched tendency toward economic stagnation has compelled capitalism to continue advancing along the path of financialization.

The persistence of financialization in core capitalist countries such as the United States is inseparable from the establishment of the contemporary imperialist order. The essence of this order is that, in order to compensate for insufficient domestic accumulation by monopoly capital, the United States coordinates with advanced capitalist countries, such as those in Europe and Japan, to continuously appropriate surplus value from other countries through global production networks, financialization, and related mechanisms, while reinforcing this process through political and military means of control.

First, multinational corporations based in the United States and other capitalist countries have constructed core–periphery global production networks through modularization and information technology. By fragmenting production processes and relocating many productive activities to peripheral countries in the Global South, they have been able to control these countries through their monopoly over key technologies and branding, while continuously appropriating surplus value by methods such as depressing procurement prices and accelerating the accumulation of intangible assets. The establishment of global production networks has also released substantial funds from fixed-capital investment for U.S. firms, enabling them to engage in mergers and acquisitions, stock buybacks, financialized corporate operations, and financial investment.5 These financial activities are, in turn, one of the principal channels through which value is transferred from peripheral to core countries, thereby further intensifying financialization and strengthening the power of monopoly-finance capital.

Second, with the rapid expansion of U.S. monopoly-finance capital, the dollar and an increasingly U.S.-centered international financial market have become the pillars of the international monetary and financial system. This has enabled the United States to carry out global financial expropriation through a variety of mechanisms, including seigniorage, financial innovation, and the expansion of financial capital.

Finally, by exercising control over international institutions such as the International Monetary Fund and the World Bank, establishing military bases across the globe, and promoting the Washington Consensus, the United States has compelled debtor countries to implement structural adjustment programs—centered on financial liberalization, privatization, and deregulation—that obstruct autonomous development. Through its combined economic, political, and military power, it has thus maintained this imperialist order.

Most countries in the Global South have not benefited from so-called globalization; instead, they have become trapped in subordinate financialization. Subordinate financialization, or international financial subordination, refers primarily to the unequal relations of control and expropriation within the world system, as manifested through monetary and financial channels.8 From a long-term historical perspective, the financial subordination of many Southern countries can be traced back to the colonial period, when their financial systems were established not to serve the needs of domestic production, but according to external imperatives. Under the contemporary imperialist order, however, the combined operation of global production networks and a dollar-based, market-led financial system has given rise to new forms of subordinate financialization in the Global South.

At the level of production, Southern countries participate in global production networks while remaining locked into the low end of value chains, earning only thin profit margins and bearing the risks generated by fluctuations in market demand and exchange rates. At the same time, workers’ wages have long been held down at low levels, and the resulting weakness of domestic demand has further reinforced these countries’ dependence on international markets. The “prudent” macroeconomic policies advocated by neoliberalism have also further compressed the space for domestic productive investment.

At the level of finance, participation in global production networks requires Southern countries to integrate into a dollar-denominated, market-based financial system. Domestic-currency assets are thereby transformed into tradeable financial assets readily subject to speculation, while domestic firms are continually exposed to the threat of shocks in global liquidity. When global liquidity is abundant, surges of speculative capital inflate asset prices; when monetary policy in core countries tightens, currency depreciation and debt crises soon follow. In addition, in order to stabilize exchange rates, Southern countries are compelled to accumulate large foreign-exchange reserves—effectively issuing high-interest liabilities in domestic currency in exchange for low-yield U.S. Treasury securities—which also constitutes one of the channels through which value is transferred.10

It can be argued that subordinate financialization in the Global South has been jointly shaped by these countries’ subordinate position and the structural transformation of contemporary capitalism. In the course of being forcibly integrated into globalized production and finance, Southern countries have likewise experienced a disproportionate expansion of financial activity relative to production. Yet the financial profits thus generated do not remain within these countries, but are instead transferred to the core capitalist economies. This process has intensified the fragility of Southern countries in both economic development and the financial sphere, while their developmental space and autonomy have been increasingly constrained by the core countries of the capitalist world system.

China’s Integration into the World Economy and the Avoidance of Subordinate Financialization

Among the countries of the Global South, China stands out as a distinctive exception. Although it has become deeply integrated into the world economy, it has not fallen into subordinate financialization. Instead, it has achieved the twin miracles of rapid economic growth and long-term social stability, and has become one of the principal engines of global economic growth. This distinctiveness needs to be understood from both the productive and the financial side.

From the productive side, the completeness of China’s industrial system, the vast scale of domestic market demand, and the monetary funds accumulated internally have been crucial in enabling China, even after its integration into the world economy, to sustain growth through industrial expansion and productivity improvement rather than falling into subordinate financialization.

First, the CPC has consistently recognized the importance of possessing an independent and self-reliant industrial system. As early as the 1950s, China had already established an independent and relatively comprehensive industrial system and national economic system. This provided the material foundation that enabled China, after joining the World Trade Organization (WTO), to absorb industrial relocation and rapidly transform foreign investment into productive capacity rather than financial expansion. More importantly, the Chinese state has been able and willing to transcend the profit-seeking logic of private capital by directing and controlling large volumes of social funds into strategic nonprofit sectors requiring long-term investment, such as infrastructure and high technology. These investments have not only directly stimulated growth through multiplier effects, but also created the general conditions of production conducive to productive accumulation.

Second, the Reform and Opening Up initiated in the late 1970s released the suppressed consumer demand of the planned-economy era, activated productive capacity, and stimulated growth. Economic growth was then translated into rising incomes for the people. As Chart 1 shows, between 2000 and 2025, wage growth among employees in urban non-private units broadly kept pace with, and in some years even exceeded, per capita GDP growth. Although the growth of migrant workers’ wages lagged somewhat behind, it still displayed an upward rather than stagnant trend. Rising incomes were further converted into domestic demand, which in turn promoted economic growth. In fact, China’s growth has relied primarily on domestic demand rather than external demand. In terms of contribution rates, between 1978 and 2025—with the sole exception of 2020, due to the pandemic—final consumption consistently contributed more to GDP growth than net exports of goods and services. Even during the period of rapid growth following China’s accession to the WTO, from 2001 to 2007, the contribution of net exports of goods and services to GDP growth was only 1.53 percent, whereas final consumption contributed 48.73 percent.

Chart 1. Index of Wage Rate and GDP per capita

Sources and Notes: Data from the National Bureau of Statistics of China (NBSC). Wage rate data for migrant workers are from various issues of NBSC, Report on Monitoring and Surveying Migrant Workers (2024), and Lu Feng, “Wage Rate Trends of China’s Migrant Workers, 1979–2010,” Social Sciences in China, no. 7 (2012): 47–67 (in Chinese). Data on wages of employees in urban private-sector units are available only from 2010 onward, but their trend is broadly consistent with that of employees in non-private units.

Finally, one reason many Southern countries fall into subordinate financialization is that economic development becomes reliant on external financing. By contrast, since the Mao era, China has adhered to the basic national strategy of depending “primarily on self-reliance while treating external assistance as supplementary.” Investment in China’s economic construction has come mainly from domestic accumulation rather than from foreign capital or trade surpluses. Since 1983, the share of foreign direct investment in total fixed asset investment has exceeded 10 percent only during 1993–2002; in all other years, the average was merely 3.5 percent. In addition, China only began to record a stable current account surplus from 1994 onward, and even at its peak in 2006–2008, this surplus remained below 10 percent of GDP; in most other years, it has stayed around 1 to 3 percent.

From the financial side, the dominant position of state-owned banks, government intervention in the financial system, and the prudent opening of the capital account have effectively guided funds toward productive sectors while also safeguarding the autonomy and resilience of the financial system.

Let us consider each of these features in turn. First, China’s financial system is bank-centered. Compared with market-based institutions, banks are better able to provide the patient capital required by industrial production. By the end of 2024, banks held 89.7 percent of assets of all financial institutions; and within the banking sector, more than 50 percent of total assets were held by state-owned banks. Compared with privately owned banks, which are more strongly oriented toward profitability, state-owned banks are better able to expand credit countercyclically, a role that proved especially important during both the Asian financial crisis and the global financial crisis of 2007–2009.14 At the same time, because state-owned banks are backed by sovereign credit, the implicit government guarantee has to some extent underpinned the stability of the financial system. The establishment in 1994 of China’s three state-owned policy banks (the China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China) has also promoted the flow of funds into priority sectors.

Second, government intervention in the financial system mainly manifests in two ways. One is an administrative control and regulatory system that is in some respects more stringent than international standards and is aimed at preserving the stability of the financial system. The other lies within financial institutions themselves, where Party leadership is embedded through Party organization-building. Especially in state-owned financial institutions, the policy objectives of the Party Central Committee can be translated into political responsibility and effectively transmitted and implemented through such mechanisms as cadre evaluation and accountability. It should be noted, however, that under the orientation of market-oriented reform, state-owned banks have also displayed behavioral instability, which in turn highlights the necessity of government intervention. Finally, the policy of the “prudent opening” of the capital account has enabled China to preserve the independent status of the renminbi and to maintain autonomy in both monetary policy and foreign exchange policy.

Although China avoided subordinate financialization, the development of private enterprises and the introduction of foreign capital in the course of market-oriented reform also gave rise to the disorderly expansion of capital within the socialist market economy, though early on this was primarily associated with the sphere of production. Since the beginning of the twenty-first century, China has been integrated into global production networks through large-scale manufacture of standardized modular components and final assembly. This model was characterized by low wages and high energy consumption; particularly in the coastal regions, poor working environments and inadequate labor protection were especially prominent, while the carrying capacity of resources and the environment also approached its limits. At the same time, with the growth of wealth and monetary accumulation, a financial market system—including stocks, bonds, and investment funds—also developed in this process.

However, because of the rapid expansion of the productive sectors and the relative lag in the development of financial markets and financial innovations, most social funds from various sources, including shadow banking, continued to flow into productive investment. In 2005, China’s fixed asset investment grew by as much as 31.3 percent, while the value added of the financial sector as a share of GDP actually declined during 2001–2005, averaging only 4.3 percent. There was therefore no clear separation of finance from production. Conversely, once the accumulation of industrial capital began to encounter obstacles, and as financial markets and financial innovations gradually took shape, surplus capital’s pursuit of higher returns led to the disorderly expansion of capital into the financial sphere. This is precisely what came to characterize the Chinese economy after the 2010s.

Financialization Tendencies and China’s Experience of Regulating Capital Since the Eighteenth National Congress of the Communist Party of China

In 2013, President Xi made the judgment that the Chinese economy had entered a “new normal,” that is, a stage characterized by the superimposition of three periods: a shift in the growth rate, the painful process of structural adjustment, and the digestion of the effects of earlier stimulus policies. Coupled with the deep adjustment of the world economy, this created an extremely complex development environment. During the preceding period of high-speed growth, China had accumulated massive productive capacity, and the 4 trillion yuan stimulus package introduced in response to the impact of the global financial crisis further expanded this capacity. On the demand side, the upgrading of domestic consumption patterns and the contraction of international markets generated both a quantitative problem of aggregate supply exceeding demand and a structural mismatch between supply and demand in the productive sphere. A considerable portion of large-scale productive capacity oriented only toward standardized demand had reached its peak; combined with rising social costs of production, this led to a decline in the profit rate of the real economy. As Chart 2 shows, the profit rate of industrial enterprises fell from 9.1 percent in 2011 to 4.1 percent in 2024, with the decline being even more severe for private enterprises than for state-owned enterprises.

Chart 2. Profit Rate on Assets of China’s Industrial Enterprises

Sources: NBSC. Profit rate is calculated as total profits divided by total assets.

Against the backdrop of declining profitability in the real economy and lagging financial regulation, China began to exhibit tendencies toward financialization. Large volumes of capital flowed into fictitious sectors such as finance and real estate, inflating asset price bubbles and gradually exposing financial risks. This phenomenon has often been described as the shift “from the real to the fictitious.” It was manifested most prominently in the growing speculative and debt-driven behavior of nonfinancial enterprises. Since the Eleventh and Twelfth Five-Year Plans successively called for the “steady” and “active yet prudent” promotion of pilot programs for mixed financial operations, the number of nonfinancial enterprises investing in the financial sector has steadily increased, giving rise to financial holding companies. These may be broadly divided into five categories: first, large enterprise groups approved by the State Council to support China’s opening-up and economic development; second, comprehensive asset investment and operating companies established with the approval of local governments; third, asset management companies established by the parent companies of central state-owned enterprise groups to manage financial business within the group; fourth, private enterprises and listed companies that gradually came to control multiple financial institutions of different types through investment and mergers and acquisitions; and fifth, certain Internet companies that, after establishing dominant positions in e-commerce, gradually expanded into finance, acquired multiple financial licenses, and built integrated financial platforms.

However, some nonfinancial enterprises—especially those in the fourth and fifth categories—became excessively driven by financial speculation and neglected the development of their core businesses. Some secured windfall profits by acquiring scarce financial licenses and rapidly transferring equity, as in the case of Jiuding Group.16 Others engaged in reckless expansion through leveraged financing, circular capital injections, and fictitious capital contributions. They appropriated massive funds from financial institutions through related-party transactions and other forms of illicit benefit transfer, and evaded domestic financial regulation by concealing their ownership structures, as in the case of the Tomorrow Group.17 Still others, under the name of technology companies, engaged in online lending in order to circumvent regulation, and used asset securitization tools to repackage and sell credit assets layer upon layer, thereby generating extremely high levels of financial leverage, as in the case of Ant Group.18 This process was also accompanied by collusion between business and government officials, as well as corruption. Such reckless expansion pushed up the leverage ratios of nonfinancial enterprises and planted the seeds of debt risk. Overall, since 2009 the leverage ratio of China’s nonfinancial corporate sector has begun to rise markedly, with particularly rapid growth between 2012 and 2016, reaching 168.4 percent by the end of 2024 (see Chart 3).

Chart 3. China’s Macro Leverage Ratio

Notes and Sources: People’s Republic of China Center for National Balance Sheets. The data series are calculated as sectoral debt divided by nominal GDP. Household debt refers to household loans, including both consumer loans and business loans. Nonfinancial corporate debt includes corporate loans, corporate bonds, trust loans, entrusted loans, undiscounted bankers’ acceptances, and foreign debt, as well as part of the debt of local government financing vehicles (LGFVs). Central government debt refers to the outstanding balance of government bonds. Local government debt includes local government bonds and other liabilities of local governments. For debt incurred by LGFVs before 2018, which is local governments’ implicit debt, the Center for National Balance Sheets distinguishes between the portion that should be classified as nonfinancial corporate debt and the portion that should be classified as local government debt. After 2018, the central government required local government debt to be made explicit: outstanding implicit debt was swapped into local government bonds, and LGFVs were stripped of their government functions. As a result, any remaining LGFV debt is classified only under the nonfinancial corporate sector.

In addition to nonfinancial enterprises, the hidden debt of local governments also expanded rapidly. Following the implementation of the new Budget Law in 2015, all local government debt was required to be brought under budgetary management, and the issuance of local government bonds became the only legal channel for local borrowing. Nevertheless, local governments continued to raise funds in violation of these rules through local government financing vehicles (LGFVs), government procurement of services, public–private partnerships (PPPs), and various development and guidance funds; in some provinces, the outstanding stock of hidden government debt exceeded explicit debt by as much as 80 percent.20 Most local government debt, however, has been directed toward medium- and long-term infrastructure projects, which are characterized by long cycles and slow returns. Against the backdrop of declining profitability in the real economy, these returns have also become increasingly uncertain. At the same time, the sources of funding are often short-term, interest burdens are heavy, and pressure to roll over existing debt is considerable, creating significant latent risks. In addition, the 4 trillion yuan stimulus package of 2009 and the monetized resettlement policy for shantytown redevelopment introduced in 2015 drove a rapid rise in housing prices in major cities, contributing to an increase in leverage in the household sector (see Chart 3).

Even so, we cannot conclude that China has already undergone a process of financialization comparable to that of the United States. Based on comparable data, although the ratio of value added in the finance, insurance, and real estate (FIRE) sectors to that in the goods-producing sectors has risen markedly since 1978, its absolute level remains far below that of the United States (see Chart 4). Moreover, since China’s financial system is still in the process of being established and improved, a relative increase in the share of value added accounted for by the FIRE sectors has its own rationale. At the same time, leverage levels in China’s household sector and central government remain relatively low, leaving room for policy maneuvers (see Chart 3).

Chart 4. Ratio of Value Added in China’s FIRE Sectors to that in the Goods-Producing Sectors

Notes and Sources: NBSC. The “FIRE” sectors are finance, insurance, and real estate. The goods-producing sectors include agriculture, forestry, animal husbandry, and fishery; industry; construction; transport; and storage.

More importantly, China’s top leadership has developed a profound awareness of the dangers of financialization. As President Xi has emphasized, “Serving the real economy is the duty and mission of finance. If we unthinkingly pursue internal circulation and isolated expansion of the financial sector, it will lose its purpose and ultimately lead to crises. China’s financial sector must perform its primary duty of serving the real economy and facilitating high-quality development. It must never sideline the real economy in favor of the virtual economy.” Since 2015, the Political Bureau of the CPC Central Committee has repeatedly convened meetings that attached great importance to preventing and defusing financial risks and to strengthening financial regulation, while introducing a series of policy measures to intensify the rectification of financial disorder and regulate the disorderly expansion of capital in the financial sphere. In 2023, the National Financial Work Conference was elevated to the Central Financial Work Conference, further underscoring the centralized and unified leadership of the Party Central Committee over financial work.

The CPC’s regulation and guidance of capital behavior have been advanced in a systematic manner on multiple fronts. In the fields of finance and real estate, the first priority has been to uphold serving the real economy and benefiting the broad masses of the people as the fundamental purpose of financial work, while strengthening high-quality financial services for major national strategies, key sectors, and weak links, including technological innovation, ecological development, rural revitalization, small and micro enterprises, and elder care. Beginning in 2025, monetary policy shifted from prudent to moderately loose, with greater support directed toward development of the real economy.

Second, China has consistently maintained its commitment to preventing and controlling financial risks. High-risk business conglomerates such as the Tomorrow Group and HNA Group have been dealt with in an orderly manner; Ant Group’s listing was suspended and the company was subsequently restructured and rectified; and existing hidden local government debt has been swapped into local government bonds. As a result, the scale of hidden debt fell by 60 percent between 2018 and 2024, standing at 10.5 trillion yuan at the end of 2024. At the same time, anti-corruption efforts in the financial sector have continued to intensify, alongside the strengthening of financial regulatory institutions and the improvement of the legal and market-rule framework governing finance.

Third, macroprudential management of cross-border capital flows has been reinforced. After the global financial crisis, large-scale movements of speculative international capital contributed to financial bubbles in China. At present, China places greater emphasis on monitoring and early warning of cross-border capital flows and, when necessary, strengthens macroprudential management in order to safeguard the stable operation of the foreign exchange market.

Fourth, China has adhered to the principle that housing is for living in, not for speculation. It has proactively regulated housing prices, sought to prevent speculative activity, and carried out the liquidation and restructuring of developers such as Evergrande, whose reckless expansion led to debt crises. It is worth noting that China has not fallen into a binary opposition between state and private ownership. Instead, while maintaining the foundational role of large state-owned commercial banks in serving the real economy and preserving financial stability, it has also promoted a financial service system characterized by a division of labor and coordination among large state-owned commercial banks, joint-stock banks, and small- and medium-sized banks.

In the sphere of production, since 2015 the CPC has successively introduced a series of strategic initiatives, including supply-side structural reform, high-quality development, and the development of qualitatively new productive forces. These initiatives are aimed at overcoming bottlenecks in key core technologies, promoting the intelligent, green, and networked transformation of modes of production, and meeting the people’s growing demand for personalized and diversified needs, thereby establishing a domestic economic circulation in which supply and demand are better aligned on the basis of harmony between humanity and nature. At the same time, China’s rural areas still contain enormous room for investment. The rural revitalization strategy, which seeks to build modern spaces of production and life in the countryside, helps absorb excess capacity and achieve a spatial fix for capital. All these measures are conducive to raising people’s incomes, freeing low-income groups from the pressures of international race-to-the-bottom competition, and expanding the size of the middle-income group so as to realize the potential of China’s vast domestic market, rather than relying, as the United States does, on consumer credit to stimulate demand. In addition, in response to such problems as disorderly competition among digital commercial platforms and the compression of profits of small- and medium-sized manufacturing firms by monopoly rents extracted by platform capital, the Chinese government has continuously strengthened anti-monopoly regulation of platforms and worked to improve market regulation, macroeconomic governance, and the policy and legal framework suited to the development of the digital economy, thereby promoting fair competition and coordinated development of capital. At present, China is launching its Fifteenth Five-Year Plan and using the goal-governance function of planning to guide private capital toward serving the country’s broader strategic objectives.

Summary

Capital’s drive for profit means that it has an inherent tendency to detach itself from production and turn toward self-circulation in the financial sphere. In reality, in order to offset the crisis of stagnation in monopoly-capital accumulation, contemporary capitalism has undergone a structural transformation toward financialization, marked by pronounced predatory, short-termist, and speculative characteristics that have obstructed the industrialization of developing countries. China’s practice of resisting financialization, by contrast, shows that it is developing a form of long-termist, production-oriented economy fundamentally different from capitalism. This has been achieved through the CPC’s regulation of capital behavior, guiding industrial capital toward the production of goods that meet the people’s needs, directing financial and commercial capital to serve the real economy and converting economic growth into people’s income rather than satisfying the interests of a few capitalists.

China’s development has also been challenged by the capitalist world. Similar to the Plaza Accord, which weakened Japan in the 1980s, the United States in recent years has launched a trade war, a tariff war, and what has been called the “Mar-a-Lago Accord,” attempting to shift its domestic crisis outward and weaken China through such means as high tariffs, dollar depreciation, debt swaps, multilateral monetary negotiations, and security charges. Yet since the period of the Chinese People’s War of Resistance Against Japanese Aggression, the CPC has attached great importance to an independent monetary policy, fully aware that once monetary policy autonomy is lost, internal economic problems cannot be overcome and external economic predation is made easier. As early as 2016, China’s official news agency Xinhua declared that China was not like Japan in the past and had no need for a “new Plaza Accord”; when exchange rate fluctuations exceed the tolerated range, the People’s Bank of China would maintain management of the exchange rate. In the face of the tariff war launched by the United States, China also responded immediately with strong countermeasures. All this shows that China refuses to be subordinately incorporated into the world capitalist system, and will not move onto a neoliberal or capitalist path.