HARVARD BUSINESS SCHOOL
9-706-041
REV: OCTOBER 16, 2006
DEBORA SPAR JEAN OI
China: Building “Capitalism with Socialist Characteristics”
We must not act like women with bound feet! If we want socialism to triumph over capitalism, we should not hesitate to draw on the achievements of all cultures. We need to learn from other countries, including the developed capitalist countries.
— Deng Xiaoping, 19921
In November 2005, the Central Committee of the Communist Party of China issued its 11th five- year plan. As was typical for such pronouncements, the plan touched on many aspects of China's economy, including its fiscal situation, its current account surplus, and its desire to equalize rural and urban incomes. But the central theme was growth. …show more content…

Most importantly, it had a communist government that remained wary of loosening the reins of its control, even as protests by workers and peasants had become increasingly common. And thus the quandary remained: could China maintain its feverish growth rate without embracing full-fledged liberalization? And if it did choose to leap completely to the market, how could it ensure that the country's prized stability was not abandoned in the process?
Background: The Rise and Decline of the Middle Kingdom
Long before China emerged as an economic powerhouse, it had been a power in its own right and a force, albeit a quiet one, in the international arena. Chinese civilization first arose in the valley of the Yellow River around 2200 B.C. Because the soil of the valley was rich but the river treacherous, the people of the region developed sophisticated techniques of “permanent agriculture” that allowed them to control the volatile waters and cultivate high-yielding strains of rice.5 On these agricultural foundations China's population boomed, and a unique and durable social structure evolved. The core of society was the extended family, several generations of sons who together farmed the family plot. Daughters traditionally moved into their husband's families and were subservient to their mothers- in-law. Above the family level, peasant farmers grouped themselves into villages, which existed as nearly self-sufficient units.
By 1120 B.C. the people of the