Deng Xiaoping’s classic slogan is wonderful because of its strategic ambiguity: just what are those Chinese characteristics anyway? And this slipperiness has led to a tendency to think of “socialism with Chinese characteristics” as a kind of dodge, a way of saying, yeah, China is really capitalist but we just don’t want to admit it, wink wink nudge nudge. I’m not sure that was ever correct, and no one less than Xi Jinping himself seems to be urging us not to think that way. In his now-famous speech on Deng’s legacy, Xi had a pretty good one-liner: “Socialism with Chinese characteristics is socialism, and not some other -ism.” And Xi repeated that line again in his speech on Friday for the 95th anniversary of the founding of the Communist Party.

Yet for a speech that was billed as heavily ideological, and whose theme was supposedly the eternal verities of Marxism, there is not a huge amount of ideological content to be found. To me the speech feels not so much ideological as highly nationalist. Xi says the Communist Party’s main achievement is not realizing socialism in one country, or some other Marxist shibboleth, but “the march of the Chinese nation with its more than 5,000 years of civilization toward comprehensive modernization.” There is plenty of Deng-style pragmatism (“Whether socialism with Chinese characteristics is good depends on the facts, on the judgment of the Chinese people”) and focus on economic growth (“Development is the Party’s top priority in governing and reviving the nation, and is the key to solving all of China’s problems”).

So it would be easy to interpret “socialism with Chinese characteristics” as just meaning whatever makes China rich and strong. And such an interpretation would be pretty consistent with Deng’s own fundamentally nationalist perspective. Yet I’m not sure we can really view the Communist Party as pure maximizing pragmatists completely unconstrained by history or ideology–surely it does make a difference that the Party comes out of the socialist tradition? Of course, the most obvious consequence of the Party’s historical trajectory is its commitment to authoritarian rule. The political meaning of “socialism with Chinese characteristics” is so obvious that it hardly needs stating: the continued rule of the Chinese Communist Party. Or, as Xi put it on Friday, that the “choice of the Chinese Communist Party to lead China’s great revival is correct.”

But I’ve also been wondering whether there are other, more purely economic consequences: what do Chinese leaders think are the fundamentals of socialism that they cannot abandon and still call themselves socialist? So far, I’ve come up with two answers. And as so often, one of Deng’s own pithy comments provides the best summary. In a 1985 interview with American journalists, Deng said: “In the course of reform we shall make sure of two things: one is that the public sector of the economy is always predominant; the other is that in developing the economy we seek common prosperity, always trying to avoid polarization.” I think that’s exactly right.

I would propose, then, that in practical terms the “socialism” part of “socialism with Chinese characteristics” means 1) a continued large role for state-owned enterprises, and 2) generous regional development policies aimed at offsetting the inequalities produced by market forces.

That the Communist Party is committed to SOEs will probably not surprise many people. Still, it’s worth recalling just how deep the historical roots are. The economic model that China’s post-1978 leaders have been working with owes a lot to Lenin’s New Economic Policy of the early 1920s in Russia. To recover from the excesses and economic disasters of the early Bolshevik period, Lenin proposed a mixed-economy model, in which market mechanisms and private firms play a major role but SOEs occupy a strategic position (the famous phrase “the commanding heights” is often attributed to Lenin at this time, but it appears only in fragmentary form in his collected works; Nikolai Bukharin, the theorist of the NEP, should probably get the credit). This mixed model did not last long in Russia, but it has persisted for some decades now in China. Given that Chinese Communist Party documents still refer to “the basic economic system with public ownership playing a dominant role,” I am probably on pretty safe ground in saying that the Party feels that it cannot give up SOEs.

The regional development angle may be a bit less obvious. But I think it also has deep roots in a different strand of socialist thought: Maoist egalitarianism. Here a good guide is John G. Gurley’s 1970 essay “Capitalist and Maoist Economic Development,” a treatment of Maoism that is unusually sympathetic. Gurley introduced a distinction between capitalist “building on the best” (investing in the places and people with the greatest comparative advantage) and Maoist “building on the worst” (deliberately investing in the places and people that are disadvantaged). Here’s how he summarizes the difference:

Capitalist development, even when most successful, is always a trickle-down development. …. In many ways, then, Maoist ideology rejects the capitalist principle of building on the best, even though the principle cannot help but be followed to some extent in any effort at economic development. However, the Maoist departures from the principle are the important thing. While capitalism, in their view, strives one-sidedly for efficiency in producing goods, Maoism, while also seeking some high degree of efficiency, at the same time, in numerous ways, builds on “the worst.” … Maoists build on the worst not, of course, because they take great delight in lowering economic efficiency, but rather to involve everyone in the development process, to pursue development without leaving a single person behind, to achieve a balanced growth rather than a lopsided one.

Mao and Deng

Deng was very explicit that his reforms rejected Maoist egalitarianism in its pure form; what he derided as “everyone eating from the same big pot” was a recipe for poverty and backwardness. But he also made clear that his acceptance of some economic inequality was purely instrumental; as he told Mike Wallace: “We permit some people and some regions to become prosperous first, for the purpose of achieving common prosperity faster. That is why our policy will not lead to polarization, to a situation where the rich get richer while the poor get poorer.”

So at the level of principles egalitarianism was not totally abandoned. And one of the most consistent ways in which this principle has been expressed is in repeated efforts to boost China’s less developed regions: from the inland development projects of the 1960s and 1970s, to the “Great Western Development” project launched by Jiang Zemin in 1999, to the “Revitalize the Northeast” campaign under Hu Jintao after 2003. All of those plans were very clearly in the spirit of “building on the worst.” In the latest egalitarian gesture, the State Council announced, just before the Party’s July 1 anniversary, an aid program for the isolated mountainous areas where Communist revolutionaries sheltered during the civil war.

So a large role for state-owned enterprises and regional development plans are features, not bugs, in the China economic model. Unfortunately a lot of the obvious waste, inefficiency and misallocation in the Chinese economy in recent years are also attributable to these features. If I’m right about the political importance of these two policies, then fixing those problems could be quite challenging.

The home of “Iron Man” Wang, the original Chinese hero of heavy industry, is, it turns out, also in the ice cream business. Rooting around in a freezer on a recent, very hot summer weekend, I came up with a bar of ice cream bearing the “Daqing” brand. This surprised me since Daqing is better known as the site of China’s largest oil field, and the inspiration for innumerable 1960s propaganda posters about the exploits of its model workers, particularly the aforementioned Wang Jinxi. But here was its name proudly displayed on the wrapper of what turned out to be a pretty tasty ice cream bar:

The ice cream bar was indeed actually made in Daqing, but rather than disguise the fact that they’re making food near a lot of toxic chemicals, the manufacturers are going all out to highlight their roots. Why? I can at least speculate. Daqing itself is indelibly associated with the Cultural Revolution, when Mao held it up as the national example of how revolutionary fervor could work economic miracles. While personally I find Cultural Revolution nostalgia creepy, it’s still a real phenomenon: some people imagine the 1960s as a less materialist, less complex, more virtuous time. The logo with its echo of socialist-realist woodcuts, the plain one-color wrapper, the proud “product of the Northeast” declaration–all these combine to evoke simpler times and convey a kind of straightforward authenticity.

Some people like to say that the Northeast was the first to adopt the planned economy and the last to abandon it, and that economic legacy is not usually thought to be a positive one. But it is still part of the region’s distinctive identity, so you might as well use it to sell stuff (the maker of the Daqing ice cream bars also sells ice cream under other brands without the socialist trappings). Of course there is something odd about using nostalgia for the high-Maoist era to sell mass-market consumer goods today, since the 1950s and 1960s in China were definitely not a time of consumer abundance. Ice cream was such an exotic luxury that it might be sampled only once a year–a far cry from the ubiquitous and cheap delights of today.

Is making ice cream in Daqing a sign of something else–perhaps the long-awaited emergence of a “consumer-driven” Chinese economy? It is true that Heilongjiang province, where Daqing is located, and the other northeastern provinces are under lots of pressure to diversify away from dying industries. The latest in a series of government plans to “revitalize” the northeast declares, correctly, that the region’s industrial structure is tilted toward traditional heavy industry and state-owned enterprises. Vice-minister of industry Feng Fei, returning from a recent inspection tour of the northeast, noted approvingly that some local governments were “promoting investment in sectors like car parts and food processing, fostering new economic growth drivers.” Ice cream has been made in Daqing since at least 2002 (when Baixing, the maker of the Daqing bars, was founded), but perhaps it is one of the industries of the future.

Yet there is a long way to go to shift the northeast’s industrial structure–you need to sell a lot of ice cream to match the economic impact of a giant oil field. Around two-thirds of Daqing’s GDP comes from oil and petrochemicals; food processing contributes just 2.5% (still higher than I would have guessed). And the city of Daqing itself accounts for a quarter of Heilongjiang’s GDP, which means that the Daqing oil industry alone generates about 18% of Heilongjiang’s GDP (on 2014 statistics). That’s huge, making it easier to understand why nominal GDP growth collapsed along with oil prices last year.

And in case it’s not obvious–yes, this whole post was basically just an excuse to write something else about Chinese ice cream.

That is an interesting and important statement from Peking University’s Niu Jun, from a roundtable commenting on the recent Pantsov and Levine biography of Deng (for what it’s worth, I agree with the consensus of the reviewers that the bio is vividly written and has interesting insights, but is marred by mean-spirited editorializing). Deng has variously been portrayed as a reformer, a revolutionary, and a dictator, but rarely first and foremost as a nationalist. Niu argues that this was one of the important things distinguishing him from other leaders of his generation, particularly Mao:

I think that Deng Xiaoping: A Revolutionary Life pays insufficient attention to another prominent facet of Deng’s identity. Vogel’s book does likewise. If one is assessing Deng’s life, one should state that he was an outstanding Chinese nationalist. There were not many such among his generation of Chinese communist comrades-in-arms. This year, “The Nine-Day Whirlwind” [aka Mr. Deng Went to Washington], a documentary film screened in China, included an interview with former U.S. National Security Adviser [Zbigniew] Brzezinski. Facing the camera, he recalled one of Deng’s talks during his January 1979 visit to the United States. Deng remembered his sojourn in France as a young man on the ‘Diligent Work Frugal Study’ program. Deng said that when he arrived in Paris, what impressed him most deeply was how backward China was in comparison. So he resolved to save his motherland and help it become a powerful country. This was the key to his becoming a Communist, because he saw this as the only way forward. …

Deng’s nationalism was manifest above all in his dealing with Sino-Soviet relations. … Deng’s method of dealing with the normalization of Sino-Soviet relations after Mao demonstrates, on the one hand, that in the Sino-Soviet theoretical debates, he was a firm supporter and executor of Mao’s policies. On the other hand, he also had important differences with Mao. In comparison with him, Deng was more of a nationalist. Put simply, Mao’s opposition to Soviet ‘revisionism’ was rooted in a more utopian way of thinking. He thought that Khrushchev’s reforms were to take the capitalist road. Of course, Mao loathed so-called Soviet chauvinism that was displayed toward the “fraternal countries,” but replacing the Soviet Union as the leader of the international Communist movement and continuing to promote the world revolution were obviously more important to him. Deng’s subsequent words and actions show that he was more inclined to oppose the Soviets for having humiliated China and for posing a threat to China’s security. His ‘anti-revisionism’ was more a matter of following and implementing Mao’s thought while his ‘anti-Sovietism’ accorded more with his own nationalist inclinations and was a distinctive feature of his foreign policy once he was in power.

In his talks with Soviet President Mikhail Gorbachev in May 1989, Deng stated that both sides were at fault with regard to the theoretical dispute, but more important was that the Soviet Union had not accorded China equal treatment. This had been a problem through several periods from Tsarist times to the Soviet era. Deng stated that the humiliation inflicted on China from Russia and the Soviet Union was almost as serious as Japan’s aggression from the same era and was extremely detestable. This talk marked the normalization of relations between the two countries thirty years after they had fallen out with each other. Deng’s lengthy speech was the result of very long deliberation on his part. For Deng the theoretical dispute was not significant; it was the Soviet attitude and the harm and threat it posed to China that were the real sources of the deterioration of relations between the two countries.

Deng and Khrushchev in 1960

Deng’s much-praised pragmatism was rooted in his nationalism: whatever made China stronger was good. In 1980, Deng’s nationalism meant recognizing that China was weak and underdeveloped, and doing what was necessary to strengthen its global position and drive economic growth, including borrowing ideas and capital from Japan. By 1990, nationalism increasingly meant taking pride in China’s accomplishments and standing up to real or perceived slights. Vogel’s biography of Deng recounts how an anti-foreign, and specifically anti-Japanese, tone was adopted in government propaganda to shore up its popular support after the chaos of 1989:

After 1989, when Western countries were imposing sanctions, there was a widespread patriotic reaction against foreign sanctions. To many Westerners, sanctions on China were a way of attacking Chinese leaders who used force on June 4, but to Chinese people the sanctions hurt all Chinese. Patriotic “education” linked nationalism to the Communist Party, as the Communists in World War II appealed to patriotism and nationalism to rally support against the Japanese. Conversely, criticism of the Communist Party was ipso facto unpatriotic. … Within weeks after the Tiananmen tragedy, Deng began emphasizing his patriotic message. The Propaganda Department skillfully publicized anti-Chinese statements by foreigners that caused many Chinese, even students who advocated democracy, to feel outraged.

There’s little question that nationalism has become the dominant political theme in China since Xi Jinping took over the top positions in 2012. While a lot of commentary has emphasized how Xi is breaking with recent precedents, the continuities with previous leaders, particularly Deng, are still quite strong. Xi’s nationalism may be another, underappreciated way in which he is building on Deng’s legacy.

For those interested in the intersection of obscure Chinese industries, regulatory politics and ancient history (you know who you are), the top story of the week is without question the long-awaited announcement of some reforms to liberalize China’s salt monopoly (here’s a news story and the original Chinese document).

China’s salt monopoly is one of the best examples of a more general principle: state-owned enterprises are often used as a substitute for regulation. Where institutions are weak and compliance difficult to enforce, as they are in most developing countries, state-owned enterprises can be a reasonably effective way to accomplish policy goals. Rather than create a whole complex of rules and try to convince people to follow them, the government can just tell an SOE what to do. The policy goal the salt monopoly accomplished for China was ensuring that salt was iodized, an important public health measure. Although news stories love to emphasize the salt monopoly’s ancient roots, in fact its latest iteration is only a couple of decades old, and was the result of a conscious decision to revive the monopoly to achieve this specific goal.

My favorite account of this history is a classic WSJ piece by Leslie Chang from June 2001. I’m quoting from the piece at length because I cannot find it on the WSJ website, probably because it is so old. As she makes clear, the monopoly was able to achieve the public health goal, though this did not come without costs and distortions. And making the transition away from the SOE model to a more sustainable system is quite tricky, as the long debate over reforming the salt industry shows.

LIZI, China — Pei Nuwa touches her neck where she has a swelling the size of a small melon. She remembers a time when almost every extended family in this farming village had someone with a goiter like hers.

“The ones who had it have all died, and now the young people and the children don’t have this,” says Ms. Pei, a 67-year-old who has tiny eyes and skin wrinkled like parchment.

Ms. Pei doesn’t know why goiters became rare, but the answer is sitting in a clear plastic bag on a grimy counter in her single-room house. It is iodized salt. Minute amounts of iodine consumed regularly — the equivalent of just a teaspoonful over a lifetime — can prevent goiter and other thyroid-related disorders.

How this bag of salt arrived in this farming hamlet in the northwestern province of Gansu represents a triumph of public health. Five years ago [i.e., 1996], only a third of the Chinese population, then 1.2 billion, consumed iodized salt. The lack of iodine in the diet caused a range of health problems, from goiters to the severe mental retardation known as cretinism to lower IQs, among a generation living in rural areas. Today [i.e., 2001], more than 90% of Chinese eat iodized salt.

But this success also underscores the halfway nature of economic reform and decentralization in China. While Beijing has quietly shifted the responsibility and funding for key social services such as education and health care to provincial governments, there are no self-regulating mechanisms or built-in incentives that force officials to carry out their duties. …

To ensure that millions got iodized salt, Beijing officials reinstated a national salt monopoly that had existed in some form for more than 2,000 years, until private operators emerged about a decade ago. The state fixed salt prices to restore the industry to profitability and wrote laws that criminalized the sale of private salt. Hundreds of private salt producers were closed, and the remaining operators were consolidated into giants that formed the monopoly. The state also put together a 400,000-person bureaucracy to run the operation, including a 25,000-strong “Salt Police” with officers in gold-braided uniforms.

The original salt monopoly was set up in 117 B.C. during the Han dynasty. For nearly two millennia, the imperial family controlled the lucrative monopoly, one of the empire’s biggest sources of revenue. Salt financed campaigns of expansion, built the fabulous villas of the merchants of Yangzhou and inspired one of the most famous policy debates of the imperial era. In 81 B.C., supporters of a monopoly in iron and salt argued that it would serve the public good, while opponents said it would stifle individual enterprise.

The monopoly’s current revival stemmed from public-health concerns. By the 1980s, Chinese officials had made headway in fighting iodine deficiency by providing iodine injections in villages with a high incidence of goiter. But the same years brought economic liberalization and an explosion of private enterprise, including manufacturers flooding the market with usually cheaper noniodized salt. By the early 1990s, this unregulated salt trade, combined with little official oversight, was erasing the public-health gains of the command-economy days. In Gansu, consumption of iodized salt dropped to just over 60% in 1991 from 90% two years earlier. …

The network of control and the costs have a downside: They heighten the appeal of smuggling illegally produced salt, which can be sold more cheaply and without paying taxes. In a case two years ago, a group of salt smugglers from neighboring Ningxia beat up five salt policemen who caught them trying to ship three tons of rock salt into the province. The ringleader is still at large. Another case involved a high-speed car chase, the confiscation of six tons of unlicensed salt, fines and jail time for the perpetrators. In faraway Hebei, several officials were recently brought in for round-the-clock questioning in connection with widespread sales of private salt. …

Health experts say that system’s functioning depends on whether official attention — and the monopoly — can be sustained. Some are troubled by recent state media reports linking monopoly-affiliated companies with smuggling, which could feed arguments that the monopoly should be dismantled. Its supporters say the market should be opened to competition, but only after good production methods and habits are ingrained. “China needs to maintain this monopoly for at least 10 more years,” says Ray Yip, a Unicef adviser in Beijing. “After that, it will be safe.”

A bit more than 10 years, it turns out. This seems like good news at the margin, though it certainly does not look like China is now ready to let a regulatory apparatus replace the policy functions of its SOEs across the rest of the economy. In many strategic areas, like energy and telecommunications, regulation-by-SOE seems to be as strong as ever.