China’s economic system could be divided into three main sectors based on ownership of the means of production: state-owned, collectively owned, and individually owned. Collective ownership has generally been regarded as a transitional form between private and state ownership. Officially, it is defined as an economic arrangement in which the means of production are owned collectively by workers. This sector encompasses agriculture, forestry, animal husbandry, and fisheries, as well as a wide range of enterprises and institutions established and managed by cities, counties, towns, and urban neighbourhoods.
Figure 31.1 is a highly simplified model of China's urban economy based only on the industrial, commercial and service sectors. It shows that paths of upward transformation from lower forms of enterprises to state ownership that the nation has followed since 1949.

As early as 1949, the authorities began to draw private businesses into a close partnership with the government by establishing "joint public-private enterprises." This new organizational model essentially created a state-controlled partnership, marking a decisive move towards complete socialization. While initially introduced gradually, this campaign eventually became the primary method for bringing all private enterprises under state ownership. The regulations governing these new enterprises clearly established the government as the dominant partner. In June 1949, Liu Shaoqi described the future economy of the PRC.

After the rule of the imperialists and the Kuomintang has been overthrown, the national economy of new China will comprise the following five sectors:
(a) the state-owned sector;
(b) the co-operative sector;
(c) the state-capitalist sector;
(d) the private capitalist sector; and
(e) the small commodity and semi-natural sector. In addition, there will remain some kinds of purely natural economy, but these are not very significant. Of these five economic sectors, the last one is absolutely pre- dominant. The co-operative sector is very small, but it can develop very fast. State capitalism also constitutes a very small part, but is capable of considerable expansion through organization.

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To make state capitalism ideologically acceptable, the Party contrasted its version with that of the Nationalists. Under the GMD government, it argued, bourgeois elites controlled the state and used state capitalism as a tool for private accumulation. By contrast, the CCP claimed that its form of state capitalism served the interests of the working classes. In this formulation, the state represented all workers and managed capital on their behalf, which, according to the Party, meant that workers were not subjected to the extraction of “surplus labor.”
Before assuming control of state-owned and private enterprises in urban areas, the Communist Party decided in January 1949 to make minimal immediate changes. Confronted with unemployment, economic disruption, and limited managerial experience, the authorities initially protected and encouraged private industry and commerce while leaving existing management in nationalized enterprises largely intact. Personnel, wage systems, labor insurance, bonuses, and organizational structures were preserved. For instance, after taking over Kunming Machine Works in March 1950, the Party made no major changes until 1952, when four departments were reorganized into eleven, expanding administration while maintaining continuity.
State capitalism developed in two main phases: elementary and advanced. Elementary state capitalism represented a "lower form" of state control, primarily focusing on the circulation of goods. In this stage, the state influenced the private sector by placing orders and purchasing products. Private companies retained management of their operations, but their transactions with the state were contract-based, without direct state involvement in day-to-day enterprise management.
In industry, this "lower form" meant the state either provided raw materials to private enterprises for processing into finished goods or placed direct orders for goods. Both methods operated within a "unified purchase and distribution system" organized by the state. After 1953, nearly all industrial trade involved fulfilling government orders. Processing of goods involved state entities supplying raw materials or semi-finished products to private companies, with contracts ensuring the return of finished products by a specified date. Payments covered wages, taxes, reasonable profits ((including dividends and bonus), and other expenses, like welfare funds. Placement of orders meant state entities ordered specific goods from private companies, detailing quality, quantity, delivery dates, and prices, allowing for reasonable profits. The "unified purchase" aspect meant the state bought certain goods exclusively from private enterprises through orders, preventing their sale on the open market, although products made from state-provided raw materials could be sold openly.

Advanced state capitalism, a "higher form," involved direct state control over a firm's production processes and direct participation in enterprise management. This led to mixed state-private enterprises, also known as Joint state-private enterprises. In these entities, capitalist assets were converted into private shares, while government investments became state shares. This arrangement resulted in the joint ownership of the means of production by both capitalists and the state, effectively eliminating purely private enterprises.

The Chinese government gradually integrated private entrepreneurs into the state-controlled economy through a three-step process: utilization, restriction, and transformation.
Utilization (1949-1952) This initial phase involved offering preferential measures to the private sector to encourage production and economic activity. The state boosted orders to private factories for manufacturing and processing, and it purchased their products, enabling entrepreneurs to continue and expand their businesses profitably. Private merchants were also permitted to engage in some import and export, and they were incentivized by price differences to transport goods for sale, which stimulated market transactions. The state bank provided loans to capitalists, boosting their confidence in investment. Additionally, commodity taxes were reduced, lowering costs for merchants.
These policies led to a significant recovery in private factories. Production surged, with flour increasing by 54%, rice by 290%, cotton yarn by 130%, and cotton cloth by 230%. The total output value from private factory processing, manufacturing, and state purchases reached 2.1 billion yuan, a 2.7-fold increase from 1949's 810 million yuan. Taxes collected from private industry and commerce also saw substantial increases in late 1950, rising by 90% and 80% respectively compared to the first quarter.
Restriction (1952-1953) Despite the positive economic outcomes of the "utilization" phase, a period of "restriction" was implemented simultaneously. In December 30, 1950,  Interim Regulations on Private Enterprises were issued, mandating that private businesses submit their production and sales plans for state approval. These regulations also stipulated fixed proportions for the allocation of private business earnings, covering dividends (20.5%), welfare funds (15%), taxes (34.5%), and reserve funds (30%).
Further tightening controls, the "three-antis" campaign in August 1951 aimed to reduce the connections between private entrepreneurs and officials. (See Article 18) and the five-antis" campaign in 1952, which significantly curtailed the private economy's scope. (See Article 30). While ostensibly targeting "imperialist, feudal, bureaucratic 'compradors'," the campaigns' purpose was also to curb the growth of the private sector and confiscate its profits. Private entrepreneurs were coerced into "self-confession" and "self-criticism," publicly acknowledging workers as their "masters."
Although, on September 7, 1953, Mao Zedong stated

"Not only must the implementation of state capitalism be based on what is necessary and feasible (see the Common Programme), but it must also be voluntary on the part of the capitalists, because it is a co-operative undertaking and co-operation admits of no coercion. This is different from the way we dealt with the landlords."

In short, the Party understood socialist transformation as a continuation of its earlier policy of “restriction,” a framework it regarded as an appropriate way to “develop” capitalism under socialist rule. For capitalists, however, the announcement of the general line came as a shock, since they had assumed, it represented a sharp departure from the principles of New Democracy. In practice, as Mao acknowledged, the so-called “three rights” of capitalists—the rights of ownership, hiring, and management—were to a large extent hollowed out under the new policy, reducing private enterprises to what were effectively “handicapped” firms. Mao estimated conservatively that the process of transformation would require ten to fifteen years to complete, yet for capitalists the nominal preservation of private ownership had already lost much of its substantive meaning.
By 1953, the effects of these campaigns were evident: the working capital of private factories and firms decreased from 232 to 182. These figures demonstrate that the restriction process largely achieved its goals.
Transformation (1954-1957) The final stage was "transformation," which began in September 6, 1954 with the GAC promulgation of  Provisional Regulations for Joint State-Private Industrial Enterprises. These regulations designated "mixed state-private enterprises" as the "advanced form of state capitalism," requiring private businesses to integrate with state investments or other mixed enterprises under the joint direction of capitalists and state-appointed functionaries.
The socialist transformation of commerce and industry was a vast undertaking that demanded far more cadres than the Party and state’s economic agencies could provide. This demand persisted even after enterprises were transformed, since they still required ongoing management. The state therefore, sought to recruit cadres who could remain in economic posts after transformation. Yet a chronic shortage of suitable personnel persisted. Those with economic expertise were largely from “incorrect” class backgrounds, while employees of private firms were viewed as politically tainted. At the same time, capable administrative cadres often resisted economic assignments, seeing them as politically marginal and personally risky: close contact with businessmen invited accusations of “bourgeois mentality,” while failure to secure cooperation risked charges of commandism.
From this point, state capital investment in these enterprises became increasingly common, with private assets converted into private shares. The government directly influenced production processes by assigning representatives to participate in and control management. This effectively transformed private capitalists into de facto state-appointed employees. By the end of 1954, there were over 1,700 joint state-private industrial enterprises, employing more than 5.3 million workers (a significant increase from 193 enterprises and about 0.1 million workers in 1949). These enterprises generated an annual output value exceeding 5 billion yuan.
In its early form, state control over commerce aimed to rein in the private sector through a system of state-managed distribution and a surrogate market. Private retailers essentially became agents for the state, which dictated the goods they sold and their operational terms. The compensation for these private businesses came in the form of commissions or handling charges, all set by state enterprises. The unified market meant that private factories had to sell their entire output to the state within a set timeframe, based on contracts with state enterprises.
The distribution market involved state commerce delegating the sale of its products to private retail shops. The state enterprises determined product prices, and private shops were required to pay cash upon receiving the goods. Their profit came from the difference between the wholesale and retail prices. Critically, these retail shops could no longer buy commodities directly from the open market, leading to nearly complete state control over the finished products market.
The surrogate market operated similarly, with private retailers acting as agents. They had to provide a security deposit to the state before selling the state-supplied products. Prices were state-fixed, and the dealers' commission was predetermined. Like in the distribution market, retailers were barred from purchasing products directly from the open market. See for more details below. See for more details on domestic commerce Article 37.

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After 1949, many cadres of the CCP held a 'left' sentiment to crush capitalism in a rush and eliminate the national bourgeoisie. They believed that the historical role of the national bourgeoisie had ended, and that the future struggle should mainly be aimed at the national bourgeoisie. They also thought that the more prosperous the state-run economy developed, the more necessary it was to squeeze the private sector.
On June 6, 1950, at the Third Plenary Session of the Seventh Central Committee of the CPC, Mao Zedong made a speech, in which he warned against these left ideas.

"The whole Party should try earnestly and painstakingly to make a success of its united front work. We should rally the petty bourgeoisie and the national bourgeoisie under the leadership of the working class and on the basis of the worker-peasant alliance. The national bourgeoisie will eventually cease to exist, but at this stage we should rally them around us and not push them away. We should struggle against them on the one hand and unite with them on the other. We should make this clear to the cadres and show by facts that it is right and necessary to unite with the national bourgeoisie, the democratic parties, democratic personages and intellectuals. Many of them were our enemies before, but now that they have broken with the enemy camp and come over to our side, we should unite with all these people, who can be more or less united with. It is in the interest of the working people to unite with them. We need to adopt these tactics now."

On July 5, 1951, Liu Shaoqi stated

"...development benefits the whole people, especially workers and the Communist Party, and aligns with our ideals—we must strive toward it. But for the bourgeoisie (large, medium, small), there are both favourable and unfavourable aspects. Their attitude will be mixed—supportive and resistant. Our policy must be one of both unity and struggle. In the later stages, commercial capitalists may face more challenges, requiring a policy of both exclusion and accommodation. The above describes the situation during the entire New Democratic stage, estimated to last at least 10 years, possibly 15 to 20 years"

Shortly, after these statements, the Sanfan and Wufan started and as Mao Zedong stated

"Party committees at all levels are requested to meticulously plan and deploy for this matter, and to treat this as a large-scale class struggle."

Some months later, on June 6, 1952, Mao Zedong wrote

"With the overthrow of the landlord class and the bureaucrat-capitalist class, the contradiction between the working class and the national bourgeoisie has become the principal contradiction in China; therefore, the national bourgeoisie should no longer be defined as an intermediate class."

In Mao Zedong's  "On new democracy", he asserted that the two phases of the Chinese revolution—the New Democratic Revolution and the Socialist Revolution—were inextricably linked. This represented a Marxist theory of revolution specifically adapted to China's unique circumstances. Leading up to the establishment of the PRC, Mao dismissed the characterization of the new democratic economy as "new capitalism." Following the PRC's founding, he believed the transition period was dynamic, with socialist elements emerging daily. Mao consistently emphasized that the concept of "establishing a new democratic order" was out of step with the ongoing struggle and, in fact, impeded the advancement of socialist initiatives. Instead of waiting for ten or fifteen years, the transition could be made immediately.
The rapid acceleration of socialist transformation post-1952, which saw the abandonment of the "ten years or more" gradualism, reveals a profound tension between the pragmatic, multi-class New Democracy and Mao's deeper, more radical ideological commitment to immediate socialist construction. The initial plan for New Democracy was conceived as a prolonged transitional phase, spanning over a decade, allowing for a mixed economy and class collaboration. However, after 1952, the CCP swiftly adopted the Soviet model, leading to widespread collectivization and nationalization of industry by 1956-1957.
Several factors contributed to this dramatic shift. The explicit adoption of the Soviet model, following Liu Shaoqi's 1952 visit and Stalin's advice, played a significant role. Stalin subsequent proposed a one-party constitution. This led to the abolition of the coalition government and the establishment of the CCP's one-party system under the 1954 constitution. As a direct consequence, some of the ideas discussed in On New Democracy and On the Coalition Government were discarded.
Furthermore, Mao's growing impatience and fear of the emergence of "new rich peasants" and "capitalist elements" within society, coupled with his conviction that socialist factors were emerging daily, suggested an imperative to seize the moment. Internal party dynamics also played a part, with divisions regarding the speed of collectivization, and Mao strongly advocating for rapid transformation. This indicates that the "compromise" inherent in New Democracy was always viewed by Mao as a temporary tactical necessity, not a long-term goal. Once state power was consolidated, the ideological imperative for a more rapid, direct path to socialism superseded the gradualist approach. This shift also highlights the CCP's increasing centralization and Mao's growing assertiveness in directing policy, even at the expense of earlier theoretical formulations.
Furthermore, while essential for achieving revolutionary victory, the methods of mass mobilization and the subsequent drive towards centralized party control, particularly in the post-1949 period, inadvertently undermined the very democratic elements initially envisioned in New Democracy. Mao's On New Democracy had advocated for "democratic centralism" and "universal and equal suffrage". The early years of the PRC did see achievements such as the abolition of feudal hierarchy and the equalization of gender differences. Mass movements were indeed powerful instruments for revolutionary victory, igniting political enthusiasm and participation among the populace. However, after 1949, Chinese democracy experienced a "severely degraded situation". The socialist transformation between 1953 and 1957 led to the establishment of a "party-state regime that controlled all aspects of society and economic life". The "mass line," originally intended to foster a dialectic between leaders and masses, shifted towards "mass mobilization" directed by top leadership, effectively eliminating any social force capable of checking the expanding party-state. The imperative for rapid socialist transformation and the consolidation of state power led to an increasing emphasis on centralism over democracy. Mass mobilization, while initially empowering, became a tool for top-down policy implementation and class warfare, rather than genuine democratic participation. In June 1953, Mao Zedong abandoned the earlier promise of New Democracy and introduced the "General Line of the Transitional Period." This new major policy, modelled after a Soviet precedent, was closely tied to the Five-Year Plan and socialist industrialization. The adoption of the General Line initiated a "socialist transformation," which involved a dramatic shift in the ownership of private industry.

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Before 1953, state capitalism remained a loosely defined notion rather than a coherent, policy-driven framework. Practices later labelled as state capitalist had already emerged during the civil war, when the Party’s overriding objective was to revive economic activity in areas under communist control; only retrospectively were these measures conceptualized as state capitalism.
At the outset, joint public–private enterprises (JPPEs) were primarily intended to address firms with mixed ownership structures, including combinations of bureaucratic and national capital, or of Japanese and Chinese capital. By late 1949, a total of fifteen such firms was operating in Shanghai. Overall, before 1949, while leaders in Northeast China actively promoted JPPEs, the Party Center and central officials remained cautious about their development. This hesitation was evident when, in July 1949, the Central-China Bureau issued a directive to stop local Henan officials from investing in private enterprises to establish JPPEs. By April 1950, Zhou Enlai instructed government agencies to only support enterprises that were "beneficial to national welfare and people’s livelihood" and that could serve both public and private interests within the JPPE framework.

In January 1951, plans promulgated by the GAC sparked the reorganization of other partially state-owned companies into joint management firms. In July of that year, the government reported that 486 Shanghai firms were under joint management, most of which were classified as expropriated Nationalist assets. As such, the JPPE represented a compromise designed to uphold the principle of protecting the private property of national capitalists. Some capitalists who could no longer sustain their businesses sought state investment and proposed joint ventures with the government, but these requests were not always accepted. On the one hand, the government lacked sufficient capital and trained personnel to commit to such enterprises. On the other, the Party feared that actively promoting JPPEs would encourage other capitalists to interpret them as a prelude to premature nationalization, thereby generating anxiety within the business community. At the same time, Party leaders suspected that capitalists might misuse state investment to pursue private gain or even strip assets from jointly operated firms.

The centrepiece of the management strategy was the Joint State-Private Ownership model. This was presented as a "middle road" where the state and the private owner shared management. For example, in the publishing sector, as early as July 1949, a CCP directive outlined the future roles of Xinhua and Sanlian. Both were Party-led publishers, but Xinhua was entirely publicly owned and slated to become a state publisher under the future central government. Sanlian, by contrast, was designated a progressive joint public-private venture and would retain that form initially, serving as Xinhua’s close collaborator. Sanlian’s privileged yet subordinate role became clearer by 1950, as it was increasingly treated like a private enterprise. Like other private publishers, Sanlian faced mounting pressure to move toward joint public-private ownership and eventual nationalization.
Another example is the fate of Zhanghua Company. Liu Hongsheng publicly aligned himself with what he presented as political “progress.” When he chose to return to China at the end of 1949, he understood that cooperation with the new regime was unavoidable and sought to earn its trust. By 1953, as public–private joint management emerged as the dominant policy direction, it was clear that the prospects for Liu’s Zhanghua Company were bleak. His decision to take the initiative in partnering with the state was thus less an act of free choice than a response to forces largely beyond his control.
During the negotiations that led to joint management, the government recognized Zhanghua’s symbolic value as a model enterprise and granted Liu and his management team certain concessions. In practice, however, Liu lost most of his authority over personnel and production decisions. He appeared outwardly satisfied with the arrangement and did not voice his reservations. Government documents note that after joint management was implemented, Liu continued to visit the factory frequently to supervise production, “despite his poor health.” He died in 1956.
By 1955, when the woollen textile industry as a whole was fully incorporated into public–private joint management, the brand that Liu Hongsheng had painstakingly built had effectively vanished. Liu and his managers—those with the greatest expertise in production and commerce—were stripped of real power. As the process advanced, even the final safeguard of private enterprise, the right to private property itself, was eliminated. Thereafter, Liu and others like him were reduced to the status of “senior staff” within state enterprises. The CCP’s industrialization strategy, grounded in the principle of total public ownership, thus abandoned not only private property but also the entrepreneurs who had once stood at the forefront of industrial modernization and economic development in China.
▉ Management Control: In practice, the state appointed a representative to lead the enterprise board (as President), while the original private owner was usually relegated to a Vice-President role.
▉ Operational Integration: Private firms became dependent on the state for raw materials, credit, and sales outlets. By 1954, many firms were effectively state-run in everything but name.
▉ Administrative Mergers: Small, inefficient private shops were often merged into larger, state-directed units to achieve economies of scale and easier administrative control. From 1949 onwards, the Chinese authorities began integrating private businesses into the state economy through "joint public-private enterprises." This new organizational model was essentially a partnership with the state, marking a definitive move toward complete socialization. Initially, the push for these joint ventures was gradual, but it eventually became the primary method for bringing all private enterprises under state ownership.

In the seven largest industrial cities, the industrial output of enterprises that were under state capitalism, as a percentage of all industrial output, was impressive: Shanghai, 58 percent; Wuhan, 65.5 percent; Xian, 70.3 percent; Harbin, 76 percent; Hangzhou, 63.7 percent; Shenyang, 55.9 percent; and Guangzhou, 32.8 percent.
Under this new structure, the government was the dominant partner. Private businessmen, while contributing all their assets, did not retain direct control. Instead, they participated in management as salaried employees, with the government primarily seeking their technical and managerial expertise. Initially, private owners received a percentage of annual profits as compensation.

The CCP initially emphasized the need for public support and voluntary agreement from private owners to join these enterprises. However, subtle pressures, such as offers of cheaper raw materials and increased business opportunities, likely influenced private firms. The Chinese press often reported positive outcomes after conversion; for example, a Shanghai foundry claimed a 12% cost reduction and 18% output increase, while nine woollen knitting shops reported a 60% increase in turnover. Despite these reported successes, only about 1,000 joint firms had been established by 1954. These were predominantly larger industrial companies, which the authorities stated accounted for 13.3% of the combined industrial output of capitalist and joint enterprises.

Between 1953 and 1956, Shanghai underwent a significant shift in its industrial landscape, moving from a predominantly private-sector model to one dominated by jointly owned and state-controlled enterprises. In 1953, 29,485 private industrial enterprises were the backbone of Shanghai's industry, responsible for a remarkable 99% of the city's total industrial output. However, by 1956, this had dramatically changed. These private businesses were consolidated and transformed into 16,768 jointly owned enterprises, which, by then, produced 66.5% of Shanghai's industrial output value.

In 1952, not all State-Owned Enterprises (SOEs) were under the direct control of Beijing. Out of 9,517 total SOEs in China, local governments at various levels owned the majority. However, the 2,254 SOEs (23.7%) that belonged to the central government were far more significant, accounting for a remarkable 71.6% of the total industrial output. This meant that while local governments managed a larger number of smaller SOEs, Beijing's control was concentrated on larger, more crucial enterprises like the Angang steelworks.
During the same period, the number of state-owned industrial enterprises in Shanghai saw a modest increase, growing from 246 in 1953 to 279 in 1956. Despite their smaller number, these state-owned entities contributed significantly, accounting for just over 33% of Shanghai's industrial output value by 1956.
China's shift towards socialism, beginning with the "General Line" in October 1953, didn't unfold as a meticulously planned progression. On October 25, 1952, Zhou Enlai reassured several representatives of capitalists.

"The method for entering socialism in the future cannot be fully described at present, but generally speaking, it will be a peaceful transition. Having undergone the bloody revolution against imperialism and feudalism, China will not shed blood a second time. Peaceful transition will take a considerable amount of time and must be natural, a "successful outcome." This could be achieved through various forms of state capitalism, leading to class elimination and individual well-being."

Instead, it accelerated unexpectedly, outpacing even the Communist Party leaders' initial projections. This rapid pace was not solely a result of Mao Zedong's ideological drive or personal urgency. It was significantly influenced by the practical incentives that factory owners encountered under the New Democracy.

In retail, the private sector's share dropped from 85% in 1950 to 49.9% in 1953. Still, especially small merchants and vendors, were allowed to continue operation. They were more scattered and large in number and the state-trading agencies and the cooperatives were unable to replace their role and take them over in a short period. There are several key conflicts and challenges in the transition from private to state-managed commerce: first, a policy conflict, local officials favoured rapid, undifferentiated substitution of private merchants—both wholesalers and retailers—contrary to the central government’s preference for a gradual, “step-by-step” approach. Then there was the problem of employment,local authorities struggled to immediately reassign displaced wholesalers and their employees, either through trade transfers or absorption into state or public sectors.
Thirdly,the substitution of wholesalers left private retailers without reliable sources of goods, as state-trading agencies failed to assume the wholesaler role due to poor planning and coordination. Above, there was a retail trade stagnation because local officials did not successfully develop a state-capitalist model for retail, leaving private retailers unsupported and consumers underserved. The fifth problem was service inefficiency, state-trading agencies and cooperatives proved inefficient, especially in rural areas, leading to long queues and public dissatisfaction. The central government criticized local officials for not leveraging private merchants to improve commodity circulation.

In the wholesale trade, the private share plummeted from 76.1% in 1950 to just 30.3% in 1953, while state commerce's share in wholesale trade increased from 23.9% in 1950 to 63.8% in 1952. Conversely, state commerce's total retail sales surged by 306%, and cooperatives by 529%, between 1950 and 1952.
While these capitalists rarely embraced socialization due to genuine ideological conviction, they had their own compelling reasons to expedite the transition. Operating as private enterprises within a state-controlled economy proved to be an ambiguous and often unworkable arrangement. Moving towards joint state-private enterprises, managed by state companies, offered a more defined and potentially stable future. This arrangement provided a stable income and reduced the operational responsibilities of private owners. Notably, some entrepreneurs actively sought joint venture status, recognizing the benefits of state support in areas such as supply chain management and labor relations, while overburdened government officials in Shanghai appear to have been reluctant to take over administration of the complex, chaotic, and struggling silk industry.
However, this transformation was far from a smooth, predetermined path. It was a highly contested and contingent process, more so than previously acknowledged. The policies concerning private industry often appears to have been ad hoc responses to emerging economic challenges in 1950s China. The unforeseen consequences of these policies ultimately propelled both the Party and private businesses toward socialization at a speed no one had anticipated or planned for in that pivotal decade's early years.

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The Party’s version of state capitalism ultimately reinforced and extended the very inequalities it claimed socialism would overcome, including the divides between city and countryside, mental and manual labor, and factory and farm. Beyond extracting surplus from rural areas, numerous policies privileged urban accumulation and allocation, allowing cities to prosper despite official denunciations of urban life as symbols of imperialism and consumerism. After 1949, for example, supplies were directed into Shanghai while more than 400,000 refugees were relocated out of the city to protect established urban residents. Policies binding rural people to limited opportunities and lower incomes culminated in the expending household registration system of 1958. See Article 5 on Hukou While cities were favoured as sites of industrialization and capital accumulation, these choices deepened the urban–rural divide and delayed transformations in urban social relations.
With the disappearance of free-market competition, capitalists were less motivated to improve or expand their enterprises. Many became indifferent to production, neglected management, and caused waste, low-quality products, and unnecessary stockpiling. Because profits were built into processing fees and prices, capitalists often inflated costs through waste or unjustified wage increases. Workers and capitalists remained in direct conflict: workers supervised production to ensure contracts were met but were still exploited laborers, reducing their motivation. Moreover, the inherent chaos and inefficiency of capitalist production clashed with the socialist economy’s need for planned, proportionate development, as the state could not fully control or coordinate the capitalist sector’s resources under early state capitalism.

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