Lenin’s New Economic Policy and Deng Xiaoping’s Reform and Opening Up – Contradictions of Communist Theory and the Embrace of State-Led Markets

Poster of Deng Xiaoping in Lizhi Park (by そらみみ via Wikimedia Commons)

When the Bolshevik wing of the Russian Social-Democratic Workers’ Party led by Vladimir Lenin overthrew the Russian government and established the world’s first Communist dictatorship in 1917, the new regime’s aim was to abolish capitalism.

“Socialism means the abolition of classes,” declared Lenin in a 1919 pamphlet. ”In order to abolish classes it is necessary … to overthrow the landowners and capitalists … In Russia, labour is united communistically insofar as, first, private ownership of the means of production has been abolished, and, secondly, the proletarian state power is organising large-scale production on state-owned land and in state-owned enterprises on a national scale, is distributing labour-power among the various branches of production and the various enterprises, and is distributing among the working people large quantities of articles of consumption belonging to the state.”

Lenin proudly boasted that “on the first day of the dictatorship of the proletariat … the private ownership of land was abolished without compensation for the big landowners”, and “within the space of a few months practically all the big capitalists, owners of factories, joint-stock companies, banks, railways, and so forth, were also expropriated without compensation.”

But ever since the 1917 revolution, Communism has had to deal with realities which contradicted its own ideological foundations. The two major Communist regimes, namely those of Russia and China, both had to reintroduce market mechanisms after severe economic crises.

In 1921, Lenin abandoned his hard-line views and allowed once again the free exchange of goods on the market and private profit. Almost 60 years later, China’s leader Deng Xiaoping did the same. Today, the People’s Republic of China (PRC) is ruled by a Leninist party which maintains its authoritarian monopoly on political power but has created a mixed market economy where state and market coexist and interact.

In this article we shall examine how the Communist regimes in Russia and China tried to cope with their failures and contradictions by making concessions to capitalism while maintaining their grip on power and their theoretical commitment to socialism.

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Lenin and the New Economic Policy

When Lenin and the Communist Bolshevik party took over the reins of Russia’s government in 1917, they set out to create a “dictatorship of the proletariat” which was supposed to give industrial workers and peasants unprecedented political power and make them masters of the state.

“Comrades, working people! Remember that now you yourselves are at the helm of state,” Lenin said in November 1917. “No one will help you if you yourselves do not unite and take into your hands all affairs of the state. Your Soviets [councils of socialist workers and soldiers] are from now on the organs of state authority, legislative bodies with full powers.”

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The outbreak of the civil war (1918-1920) between the Bolshevik government and anti-Bolshevik forces, as well as opposition from two competing leftist groups, the Mensheviks and the Socialist Revolutionaries, shaped Lenin’s course of action. The Bolsheviks cracked down on dissent (“red terror”), and pursued a highly unpopular economic strategy known as “War Communism”.

War Communism was an economic system based on the coercive requisition of agricultural produce from the peasantry, and the centrally organized allocation of supplies for industrial production, consumption by ordinary citizens and for the army. Money was replaced by the provision of supplies and the payment of wages in kind. The state nationalized large industrial facilities, and in November 1920 a decree announced that all enterprises employing more than five workers where mechanical power was used, and more than ten workers in small handicraft workshops, would be nationalized. State monopolies were established, the supply and demand-based market exchange of goods was eliminated, and the state bureaucracy was tasked with supplying consumption goods to the population (Dobb, M. (2012). Soviet Economic Development Since 1917, chapter 5; Service, R. (2000). Lenin. A Biography, p. 421).

War Communism achieved the goal of providing the army with supplies, a necessary precondition for the Bolshevik military victory. But it ruined the economy and caused popular discontent. By 1921, large-scale industry was producing only 21 percent of its 1913 output. Pig-iron production had dropped from 4.2 million tons to 0.1 million, steel from 4.3 million to 0.2 million and coal output from 29 million to nine million tons. The agricultural productivity index was 60 percent of its 1913 value, the index of railway tonnage carried had dropped from 132.4 to 39.4, while the value index for exports had dropped from 1520 to 20.

The drop in agricultural output was caused by the peasants’ hostility towards the government’s policy of forcibly requisitioning produce to feed the army, industrial workers and the urban population. The situation was made worse by bad harvests, especially in 1920 and 1921, by a commercial blockade on the part of Western powers, and by the reluctance of foreign countries to trade with the Soviet regime (Ronald W. Clark (1990). Lenin. A Biography, pp. 430-431).

Lenin was becoming increasingly aware of popular discontent. During the Eighth Congress of the Soviets in 1920 he held talks with peasant representatives, and later he gave audiences to small delegations of peasants. He made trips to Yaropolets and Modenovo in the Moscow countryside and spoke to local citizens. He understood how unpopular the regime had become among the people who were supposed to be its base of support.

Lenin knew that the centralized economy was not efficient. He himself had to frequently absolve local officials from delivering the grain quotas he had fixed because they turned out to be unrealistic. War Communism was bureaucratic, unpopular, and did not provide for the high standard of living which was one of the main objectives of the revolution.

On 2 February a Soviet official named Sokolov, who had just visited Siberia and had witnessed local revolts, privately advised Lenin to act quickly before discontent turned into something more extreme. The same day Nikolaj Bucharin gave a report to the Politburo regarding an uprising in Tambov province, in the Volga region. Lenin had to send the Red Army to put it down (Service 2000, p. 423).

The Tambov revolt convinced Lenin that the wartime economy was unsustainable. The Politburo met on February 8, 1921, and Lenin advocated for the abolition of the requisitioning system. Present were Stalin, Lev Kamenev and Nikolaj Krestinskij (ibid., p. 424).

During the meeting Lenin wrote the rough draft of the ‘Theses concerning the Peasants’, which was the first document outlining the transition from War Communism to what was later called the New Economic Policy (NEP).

It included the following four points: “1) Satisfy the wish of the non-Party peasants for the substitution of a tax in kind for the surplus appropriation system (the confiscation of surplus grain stocks). 2) Reduce the size of this tax as compared with last year’s appropriation rate. 3) Approve the principle of making the tax commensurate with the farmer’s effort, reducing the rate for those making the greater effort. 4) Give the farmer more leeway in using his after-tax surpluses in local trade, provided his tax is promptly paid up in full” (Clark 1990, pp. 433-434).

As Martin McCauley put it: “If War Communism was a leap into socialism then the New Economic Policy (NEP) was a leap out of socialism” (McCauley, M. (1993). The Soviet Union. 1917-1991, p. 48).

Although the wartime centralized economy was supported by many hard-line Bolshevik cadres, the need for pragmatic solutions was becoming increasingly evident. The Communist Party had to contend not only with workers’ strikes in major cities as well as with peasant uprisings in the Volga region, in Ukraine, in southern Russia and in western Siberia, but also with a rebellion of sailors from the Kronstadt naval base on Kotlin Island, just west of Petrograd (present-day St. Petersburg). It was clear that the Soviet government needed to regain popular support, especially with the social groups it claimed to represent.


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Lenin and Trotsky both agreed on the need for economic reforms. On 24 February 1921 the Central Committee approved the working party’s report with just a few modifications. In March, Lenin introduced the NEP at the 10th Party Congress, which was attended by nearly 1,000 delegates representing 732,000 members (Clark 1990, pp. 432, 435; Service 2000, p. 425).

Lenin and Trotsky (centre) among delegates at the 10th Party Congress in 1921 (public domain, via Wikimedia Commons)

At the Congress Lenin defended the introduction of War Communism while arguing that since the military conflict had ceased it was time to reform the system. On March 15 Lenin told the delegates:

Comrades, the question of substituting a tax for surplus-grain appropriation is primarily and mainly a political question, for it is essentially a question of the attitude of the working class to the peasantry … We must try to satisfy the demands of the peasants who are dissatisfied and disgruntled, and legitimately so, and who cannot be otherwise …

[I]t will take essentially two things to satisfy the small farmer. The first is a certain freedom of exchange, freedom for the small private proprietor, and the second is the need to obtain commodities and products. What indeed would free exchange amount to if there was nothing to exchange, and freedom of trade, if there was nothing to trade with! …

What is free exchange? It is unrestricted trade, and that means turning back towards capitalism. Free exchange and freedom of trade mean circulation of commodities between petty proprietors.

[C]an freedom of trade, freedom of capitalist enterprise for the small farmer, be restored to a certain extent without undermining the political power of the proletariat? Can it be done? Yes; it can, for everything hinges on the extent. If we were able to obtain even a small quantity of goods and hold them in the hands of the state—the proletariat exercising political power—and if we could release these goods into circulation, we, as the state, would add economic power to our political power. Release of these goods into circulation would stimulate small farming, which is in a terrible state and cannot develop owing to the grievous war conditions and the economic chaos. The small farmer, so long as he remains small, needs a spur, an incentive that accords with his economic basis, i.e., the individual small farm. Here you cannot avoid local free exchange. If this turnover gives the state, in exchange for manufactured goods, a certain minimum amount of grain to cover urban and industrial requirements, economic circulation will be revived, with state power remaining in the hands of the proletariat and growing stronger … In this respect, we are very much to blame for having gone too far; we overdid the nationalisation of industry and trade, clamping down on local exchange of commodities. Was that a mistake? It certainly was.

[my emphasis]

The NEP thus allowed freedom of exchange on the market, while at the same time maintaining the political dictatorship of the Communist Party and its overall supervision of the economy. Peasants were allowed to sell their surplus on the market, giving them an incentive to produce more. Traders and small manufacturers could provide industrial goods and services.

As Winston Churchill later sarcastically remarked: “[Lenin] repudiated what he had slaughtered so many for not believing. They were right it seemed after all. They were unlucky that he did not find it out before” (Churchill, W. (2013). The World Crisis: The Aftermath, chapter 4).

Yet the NEP was only a partial restoration of capitalism. The state maintained control over the so-called “commanding heights” of the economy: large scale industry, most wholesale and some retail trade, banking, transportation, communications, foreign trade, partial wage and price control, and macroeconomic development (Moss, W.G. (2004). A History Of Russia: Since 1855, p. 228).

The NEP was far from solving all issues facing the Soviet economy, which continued to be plagued by poverty, lack of adequate housing, workers’ disputes, the reduction in the size of farmers’ landholdings etc. One of the most curious phenomena of the NEP era was the so-called “scissors crisis”, i.e. the shortage of industrial goods in relation to agricultural ones, which caused the ratio of industrial to agricultural prices to be more than three times that of 1913. That meant that peasants who sold their produce on the market were not earning enough to be able to afford the industrial products they wanted (Hosking, G. (2017). History of the Soviet Union, chapter 5).

Moreover, the NEP was implemented too late to prevent a disastrous famine, mainly in the Volga valley, North Caucasus, and southern Ukraine, resulting in millions of victims. The Soviet authorities even asked for support from abroad, primarily from the American Relief Administration (ARA). By mid 1922 the ARA was feeding over ten million people. Like the tsarist government in 1891, the Soviet government initially refused to admit that there was a famine and continued to export grain to earn foreign currency instead of feeding its own population (Moss 2004, p. 228).

Nevertheless, the introduction of the NEP had an overall positive long-term impact. By about 1926 “State and small scale industrial, handicrafts and agricultural output was back to the average level achieved over the years 1909-13” (McCauley 1993, p. 55).

The NEP created a new social group made up of financiers, traders, manufacturers, merchants, craftsmen, speculators – commonly referred to as “NEPmen”. Their incomes varied considerably, but a few of them made huge fortunes. The American anarchist Emma Goldman noted that the NEP “turned Moscow into a vast market place. Trade became the new religion. Shops and stores sprang up overnight” (Moss 2004, p. 229-230).

During this period, state-owned companies and cooperatives competed with private businesses. Despite receiving preferential treatment from the government, the “socialist” stores were considered inferior to the private ones, which in 1927 still made up 75 percent of the retail sector (ibid., p. 230).

The NEP also came to be associated with the “vice economy” of night clubs and gambling houses where drugs and prostitution were available.

Another important aspect of the NEP was its connection with Soviet foreign and trade policy. After the chaos and disruption of the war economy, Lenin had come to believe that the Soviet state needed capitalist expertise and technology to promote economic development. The day after the 10th Party Congress, an Anglo-Soviet trade agreement was signed in Moscow.

Lenin’s pivot towards the market economy convinced Western powers that the Soviet regime had abandoned its most radical ideas, and that it was possible to coexist with it. As then-British Prime Minister David Lloyd George put it in the House of Commons on 10 February 1920: “We have failed to restore Russia to sanity by force. I believe we can save her by trade. Commerce has a sobering influence in its operations. The simple sums in addition and subtraction which it inculcates soon dispose of wild theories” (Clark 1990, pp. 440-443).

Lenin’s new attitude to foreign trade is illustrated in a letter he sent to Washington B. Vanderlip, an American businessman who had shown interest in acquiring oil concessions in the Kamchatka region.

“I thank you for your kind letter of the 14th & am very glad to hear of President Harding’s favourable views as to our trade with America,” Lenin wrote. “You know what value we attach to our future American business relations. We fully recognize the part played in this respect by your syndicate & also the great importance of your personal efforts. Your new proposals are highly interesting & I have asked the Supreme Council of National Economy to report to me at short intervals about the progress of the negotiations. You can be sure that we will treat every reasonable suggestion with the greatest attention & care. It is on production & trade that our efforts are principally concentrated & your help is to us of the greatest value” (ibid., p. 441).

Among the Soviets’ joint projects with foreign experts was the military cooperation with the German army. By 1922, 350 German engineers were working in Russia, many of them in an aircraft factory created by aircraft designer Hugo Junkers near Moscow (ibid., p. 444).

The NEP did not enjoy the overwhelming support of the Communist Party. Many hardliners saw the NEP as a betrayal of the ideals of the revolution. Others were simply jealous of the wealth and power the NEPmen accumulated (Moss 2004, p. 230).

The Communists were split into two factions. The “right wing”, led by Nikolaj Bucharin, Alexej Rykov and Michail Tomskij, supported the NEP. The “left wing”, led by Leon Trotsky, Grigorij Zinoviev and Lev Kamenev, believed that the Soviet government should crack down on capitalism and create a purely Communist system.

Joseph Stalin tactically allied himself with the right wing in order to get rid of Trotsky, only to later oust the leaders of the right faction and seize power. He subsequently abolished the NEP and launched a ruthless programme of forced collectivization, nationalization of production and central economic planning (ibid., p. 242).

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Deng Xiaoping’s Reform and Opening Up

In 2010 the People’s Republic of China (PRC) overtook Japan to become the world’s second-largest economy. China’s nominal GDP was $5.8 trillion, while Japan’s was $5.4 trillion.

By contrast, in 1972, China’s GDP stood at $113 billion, lower than Germany’s $299 billion, the United Kingdom’s $169 billion, Japan’s $479 billion, and the United States’ $1.2 trillion.

According to the World Bank: “Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 800 million people have been lifted out of poverty … China is now an upper-middle-income country.”

The architect of China’s reform and opening up policy was Deng Xiaoping (1904-1997). He and his allies fundamentally changed the trajectory of the PRC’s political and economic system by shifting away from the planned economy and the Maoist personality cult, while at the same time maintaining the absolute power of the Chinese Communist Party (CCP).

In many respects, the experiences of the Soviet Union and the PRC are inverted. The Soviet Union in the 1930s moved away from the NEP towards Stalin’s personality cult, terror and the centrally planned economy. The PRC, on the other hand, first went through Mao Zedong‘s personality cult and central planning, and later under Deng Xiaoping it embraced a mixed market economy and collective-bureacratic party leadership.


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As a young man Deng moved to France to take part in a student-worker programme, which allowed him to receive training and work in the country. During his seven years in France, from 1920 to 1927, he not only gained important personal experiences and knowledge working in factories and getting acquainted with Western society, but he was also drawn to the fledgeling Chinese Communist movement.

In 1923 he attended the first congress of European young Communists. In July 1924, he became a member of the CCP, which at that time had just about 1,000 members in China and France. Deng was not yet twenty years old. In 1926, after fellow Communists warned him that he might be arrested due to his political activities, he fled France and sought refuge in Soviet Russia (Vogel, E.F. (2013). Deng Xiaoping and the Transformation of China, chapter 1).

Deng arrived in Moscow on January 17, 1926, and two weeks later he was admitted to Sun Yat-sen University, which the Soviet authorities had recently established for the sole purpose of training members of the Guomindang (Chinese Nationalist Party) and of the CCP. Among the students were Chiang Ching-kuo, son of China’s soon-to-be leader Chiang Kai-shek, as well as two daughters and a son of the Chinese warlord Feng Yuxiang.

Deng attended classes eight hours a day, six days a week. His courses included the study of works by Marx, Engels, and Lenin, as well as classes on historical materialism, economic geography, the history of the Soviet Communist Party, and the history of the Chinese revolutionary movement.

During that time, the Soviet Union was still under the NEP. That was the Soviet system which Deng experienced first-hand and which left a long-lasting impression on him. As Ezra Vogel explained:

Deng believed, as did others at that time, that such an economic structure whereby private enterprise was allowed and foreign investment was encouraged, all under Communist Party leadership, promoted faster economic growth than could be achieved in capitalist economies. The fundamentals of the NEP, a market economy under Communist leadership, were similar to those of the economic policies that Deng would carry out when he was in charge of China’s Southwest Bureau in 1949 1952 and those that he would reintroduce in the 1980s (ibid.).

Deng returned to China in January 1927. During the civil war between the CCP and the Guomindang, he joined Mao Zedong’s forces and took part in the Long March (1934-1935). From then on, he remained a loyal follower of Mao, although the two men had quite different visions regarding China’s economic policy.

We have already mentioned that the Communist Party in Russia had a “right-wing” and a “left-wing” faction. The first supported the NEP and grew out of the first years of the Soviet experiment under Lenin’s leadership. The latter, championed by Stalin, advocated for the total control of the economy and every aspect of society by the state.

Mao Zedong was a Stalinist who created in China a command economy and a cult of personality. In 1953 Mao described Stalin as “the greatest genius of the present age, the great teacher of the world Communist movement”. Mao’s radical totalitarian ideology brought upon China the disasters of the Great Leap Forward and the Cultural Revolution.

Despite being a loyal follower of Mao, Deng Xiaoping fell out of favour with him. In 1967 Mao put Deng and his wife, Zhuo Lin, under house arrest, where they remained for two years. On October 26, 1969, Mao sent Deng and Zhuo to Nanchang in Jiangxi province. Deng’s request for a meeting with Mao before his departure was denied (ibid., chapter 2).

In Jiangxi, Deng and Zhuo were assigned to work every morning at a small county tractor repair station. As part of their “re-education” programme, they were also required to attend one hour of supervised compulsory reading of Mao Zedong’s works.

While Deng was in exile, his eldest son, Deng Pufang, a student in the Department of Physics at Beijing University, was attacked by a Red Guard group led by Nie Yuanzi, for the sole reason that he was the son of a disgraced official whom Mao had condemned. Nie was a radical Mao supporter and she became known as the “madwoman of the age of chaos” (Dillon, M. (2014). Deng Xiaoping: The Man who Made Modern China, p. 183).

It is not clear what exactly happened. Deng Pufang was either thrown out of a window or he jumped to try to escape the Red Guards. Due to the fall, he broke his back. Though he was taken to a hospital, the doctors did not perform the surgery he needed because they were afraid of treating the son of a man who was deemed an enemy of Mao. As a result, Deng Pufang became paralyzed (ibid.; Vogel 2013, chapter 2).

In spite of all that he and his family had to endure, Deng Xiaoping continued to admire and support Mao. In 1972 he sent Mao a letter of self-criticism. He admitted to failing to seek Mao’s opinion and to properly implement his policies. He wrote that he had not been able to fully eliminate his “capitalist” thinking, and that the Cultural Revolution had revealed his errors. He also promised that he would never reverse the verdicts on people criticized during the Cultural Revolution. In early 1973, Mao allowed Deng to return to Beijing (ibid.).

Following Mao’s death in 1976, Deng Xiaoping rose to power. He had been branded a “capitalist” by the Maoist faction, and in a certain sense he indeed was. Just like Lenin in the 1920s, Deng realized that the Communist Party had gone too far and that the centrally planned economy simply was not working.

Deng’s attitude towards Mao was highly contradictory, and those contradictions shape the PRC until today. Deng was in Moscow in 1956 when Soviet leader Nikita Khrushchev had denounced Stalin. Deng believed that this had destabilized and harmed the Soviet Union, and he decided not to do to Mao what Khrushchev had done to Stalin. Deng repudiated a part of Mao’s legacy in practice, without openly condemning Mao.

Deng argued that Mao had liberated China and overall he had been correct, but that he had also made mistakes. One of those mistakes was the personality cult, which he decisively departed from and criticized once he assumed the Party leadership. The second mistake was Mao’s ideological economic policy. Deng was determined to reform the system, develop the economy and raise living standards.

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On 11 January 1979 the Chinese government released 25 policy measures to speed up agricultural production and modernize agriculture by introducing the “responsibility system”. Behind this phrase hid the intent of dismantling the system of People’s Communes and of allowing peasant households to sell their produce for profit. On the same day, the Central Committee decided that the labels of landlord and rich peasant, which had been used by Mao to launch his campaigns of class struggle, should be formally abolished (Dillon, M. (2010). China: A Modern History, chapter 15).

Deng Xiaoping and his colleagues did not know exactly how to reform the economy, so they allowed local officials to experiment. Experimentation was indeed one most important and successful guiding principles of the Deng era. He set the goals to achieve, but he did not predetermine how they should be achieved.


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For instance, in January 1979 Wan Li, the CCP Secretary for Anhui province, visited drought-stricken areas in Fengyang County and signalled that the government would give peasants more freedom to produce and sell. Although at that time peasants were still members of collective teams which had to deliver fixed quotas of crops to the state, Li allowed the individual households to grow any crops they wanted and sell their surplus produce either to the state or on the market. In 1980 Wan Li’s policy was endorsed by Deng. Li was promoted to the Party Politburo in Beijing and appointed deputy premier in charge of agriculture (Unger, J. (2002). The Transformation of Rural China, chapter 5).

However, many party officials were still reluctant to enact any changes. They remembered the Mao-era campaigns against “rightists”, and they were very cautious in implementing market reforms that might be later denounced if a different CCP faction came to power, or if Beijing suddenly reversed its policy. In order to overcome these difficulties, the government used state and party media to attack some local officials and accuse them of “ultraleftist thinking”. Local officials got the message. They became afraid of being labelled as “ultraleftist” and punished, and so they began implementing rural reforms (ibid.).

During the 12th CCP National Congress on September 1, 1982, Deng declared:

The present Congress is being held in circumstances vastly different from those prevailing at the time of the Eighth Congress [when Mao was in power] … Our Party now has a much deeper understanding of the laws governing China’s socialist construction than it did at the time of the Eighth Congress, it has much more experience and is much more purposeful and determined to implement correct principles … In carrying out our modernization programme we must proceed from Chinese realities. Both in revolution and in construction we should also learn from foreign countries and draw on their experience, but mechanical copying and application of foreign experience and models will get us nowhere. We have had many lessons in this respect. We must integrate the universal truth of Marxism with the concrete realities of China, blaze a path of our own and build a socialism with Chinese characteristics-that is the basic conclusion we have reached after reviewing our long historical experience. China’s affairs should be run according to China’s specific conditions and by the Chinese people themselves. Independence and self-reliance have always been and will always be our basic stand. While we Chinese people value our friendship and co-operation with other countries and other peoples, we value even more our hard-won independence and sovereign rights. No foreign country should expect China to be its vassal or to accept anything harmful to China’s own interests. We shall unswervingly follow a policy of opening to the outside world and actively increase exchanges with foreign countries on the basis of equality and mutual benefit (Deng, X. (1987). Fundamental Issues in Present-day China, pp. 2-3, my emphasis).

In April 1983, he stated:

In a socialist country, a genuinely Marxist ruling party must devote itself to developing the productive forces and, with this as the foundation, gradually raise the people’s living standards. This means building a society with high material standards. For a long time in the past we ignored the development of the productive forces, so now we are paying special attention to building a society with high material standards. At the same time, we are building a socialist society with high cultural and ideological standards, which essentially means that our people should be imbued with communist ideals, have moral integrity and a good general education and observe discipline. Internationalism and patriotism both belong to this realm (ibid., p. 17).

From Deng’s point of view, there was no contradiction between market reforms and socialism. He was not operating in an ideological vacuum, because he had already seen how the NEP worked in Soviet Russia. It must be emphasized that Deng, just like Lenin, had no intention of “liberalizing” the economy in the neoliberal, laissez-faire sense of the word. He wanted to retain state control of fundamental aspects of the economy.

The agricultural market reforms of the Deng era were successful. The production of grain and cotton reached a record high in 1984, other major crops like beets and sugar cane recorded over 10 percent growth between 1978 and 1984. Agricultural expansion created large surpluses that in turn led to the growth of trade and other commercial activities (Chung, H. (2004). China’s Rural Market Development in the Reform Era, chapter 3).

As Him Chung noted:

The revival of China’s rural markets in the reform era is attributed by some scholars to the unleashing of market forces following the withdrawal of state control. This argument is unconvincing because it oversimplifies what has happened in China. Economic reform should be regarded as a redistribution of political power between the state and local governments, with more control decentralised to the local level; a process which has changed the inter-relationship between state and local governments and created a new context during the reform era (ibid.).

Another important initiative taken in the Deng era was the establishment of Special Economic Zones (SEZ). One example of this policy was the city of Shenzhen, which at the time was a small town of about 30,000 people near the border between the PRC and the British colony of Hong Kong. What drew the attention of the authorities to this seemingly unremarkable place was the so-called “Great Exodus to Hong Kong”. Between the 1950s and the 1980s, nearly 1 million PRC citizens fled to Hong Kong via Shenzhen to escape poverty, famine, and political persecution. Hong Kong was not only much wealthier than the PRC, but it also enjoyed freedoms and civil liberties unknown in Mao’s totalitarian regime. Emigration to Hong Kong reached a new peak in the late 1970s (Hu, R. (2020). The Shenzhen Phenomenon: From Fishing Village to Global Knowledge City, chapter 2).

The situation was a source of concern among local party officials. When Deng Xiaoping received reports regarding the conditions in Shenzhen, he said that the cause of the emigration issue was the difference between the poverty of mainland China and the high standard of living in Hong Kong.

In 1978, the CCP appointed Xi Zhongxun as Party Secretary of Guangdong province – the province where Shenzhen is located. Xi, a reformist ally of Deng and the father of President Xi Jinping, inspected the area and talked with local residents. On 6 March 1979, the Guangdong Government approved a document titled “Several Regulations on Developing the Economy on the Border”, which outlined 13 favourable policies on economic and social development (ibid.).

Yuan Geng, the head of the China Merchants Group, a PRC state-owned shipping and logistics enterprise based in Hong Kong, believed that the Shenzhen area could combine the advantages of its proximity to Hong Kong and of cheap land and labour to spur economic growth. Yuan proposed the establishment of an industrial zone in Shenzhen’s Shekou area, which was approved by the central government. China Merchants Group’s Shekou Industrial Zone was set up on 31 January 1979. Later that year, the government endorsed the idea of turning the entire Shenzhen area into a SEZ, which was formally established in August 1980. Deng Xiaoping visited Shenzhen for the first time in January 1984 to show the full support of the government for the project (ibid.).

However, opposition to Deng’s market reforms among the Maoist wing of the party remained strong. Some worried that the opening of trade would turn China once again into a semi-colony of foreign powers. In this context, Lenin’s NEP provided a framework and a precedent for the Deng faction to argue in favour of reforms. As Zhang Wei-Wei explained:

The work conference of December 1980 sent another chill to the zone idea, as the conference decided to give priority to readjustment and slow down the pace of the SEZS. When the campaign against bourgeois liberalization came to its peak in 1981, Hu Qiaomu and Deng Liqun attacked the notion of state capitalism in the SEZs. They argued, ‘after three decades of socialism, (the notion) could cause ideological confusion (sixiang hunluan) if one talks glibly about state capitalism and in particular state capitalism involving foreign capital and the special and flexible policies’ for the SEZS. This indicated their strong displeasure for the socialist ‘concession’ to state capitalism.

The reformers argued in defence of the zones. They held that the SEZs were not concessions because they were not subjected to the extraterritorial rights enjoyed by foreign nationals in pre 1949 days. Foreign businessmen must operate under Chinese law. Preferential treatment extended to foreign investors was mutually beneficial, and therefore the SEZS would not be transformed into ‘colonies.’ Lenin’s New Economic Policy was the standard discursive framework in support of the zone idea, as the reformers claimed that Lenin endorsed the idea of socialist countries making use of state capitalism and foreign capital for promoting their economic development without abandoning their sovereignty and ideology. The reformers admitted that some exploitation did exist in the zones. However, this was a kind of ‘buying out policy’ similar to the method used against the national bourgeoisie in the early fifties and justified by Lenin’s New Economic Policy. Moreover, such a policy was indispensable if China was to acquire the much needed capital and technology necessary for China’s modernization (Zhang, W. (1996). Ideology and Economic Reform Under Deng Xiaoping, 1978-1993, p. 79).

In June 1983 Deng Xiaoping publicly defended his reformist agenda, signalling his determination to make sure that his policies would not change. Being a staunch nationalist, Deng articulated his policies in a way that stressed national independence from foreign domination:

The modernization we are striving for is modernization of a Chinese type. The socialism we are building is a socialism with Chinese characteristics. This is because we are acting according to our own concrete realities and conditions and mainly relying on ourselves. Now that we are on the right track, our people are happy and we are confident. Our policies won’t change. If they do. it will be only for the better. And our policy of opening to the outside world will only expand. The path won’t become narrower and narrower but wider and wider. We suffered too much from taking a narrow road. If we turned back, where would we be headed? We would only be returning to backwardness and poverty. The policy of abandoning the practice of “everybody eating from the same big pot” won’t change. Industry has its distinctive characteristics, and so does agriculture; the experience of one can’t be applied to the other. But the “responsibility system of determining remuneration according to output” remains our basic policy, of that you can be sure (Deng 1987, p. 18).

The idea that Deng’s approach was influenced by what he witnessed in Soviet Russia in the 1920s has been acknowledged by the PRC’s state media to this day. In 2017 the state-owned website china.org.cn noted that it is “widely believed that the elements of free markets and trade contained in the NEP had influenced Chinese paramount leader Deng Xiaoping in launching reforms and opening up.”

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