1. Introduction

Since 1978, a series of economic reform and opening to the West policies have promoted China's rapid rise in many social and economic fields. As a result, China has begun to play an increasingly important role in international affairs. However, the government has always insisted that it will stick to the socialist road, leading to a puzzling paradox (Li, 2004; Zhai, 2019): How did China achieve such great economic success without fundamental changes in its political system? Over the past 40 years, Chinese and foreign scholars have conducted a great deal of research on this issue, and have proposed explanations that include factor endowment (Henri, 2019), improved management of human capital (Fleishe, Li, & Zhao, 2010), development of a competitive advantage (Porter, 1991), management of the country’s endowment of natural resources (Hilmawan & Clark, 2019), and economic institutions (Robinson, Daron, & Simon, 2005). However, no fully convincing explanation has been offered, and solving the riddle of China’s institutional change remains a major challenge in the field of political economy.

In contrast with traditional capitalism and the former Soviet Union’s type of socialism, China is exploring a new development path within a new social system. That system retains the effective elements of a centrally planned economy and a market economy, but is beginning to incorporate new production relationships that are more suitable for the interests of knowledge workers such as scientists, engineers, and computer programmers. This effective combination of the old and new systems has avoided political turmoil similar to what occurred during the breakup of the former Soviet Union, has maintained social stability, and has promoted social and economic progress and development. Through reforms that support this innovation, China has gradually stepped into a new stage of social development that is different from traditional capitalism and Soviet socialism. Under the joint action of three systems (public ownership, private ownership, and the new shared ownership), China’s economic miracle has emerged.

The new system has been very effective in high-tech enterprises and the knowledge-based economy, and is now an important force driving the rise of China. The associated institutional change represents a major change in social production relationships, and suggests that Chinese society is entering a new stage of development. Although this institutional reform is not yet complete, the effectiveness of the new system is already clear. It is the inevitable result of human social development that intellectual labor replaces physical labor and that the knowledge economy replaces parts of the traditional industrial economy. If all countries could learn from China’s example to promote the development of their knowledge economy through similar institutional innovations, human social development would be greatly accelerated.

The definition of property rights is an important foundation for social evolution and is a symbol of social civilization (Coase, 1959). Unlike the French bourgeois revolution of 1789, the Chinese institutional change that occurred in 1978, led by Deng Xiaoping, was so gentle that both domestic and foreign scholars underestimated its significance. In this paper, We will explain why China’s reforms and opening up to the West under Deng represents a rejection of millennia of civilization dominated by a small number of society’s elite and has solved an important part of the problem of how to promote innovation in the knowledge economy. Although the evolution of China’s new system is not complete, it shows signs of leading China into a new stage of social development.

2. The emergence of shared property rights

Institutional change in China resulted from a series of property rights innovations, including the restoration of the private property rights and competitive markets that were abolished by Mao Zedong after the Chinese Revolution. China’s new approach preserves the system of collective property rights established by Mao and retains government control of non-competitive sectors (including government monopolies such as the electrical power, railway, and energy source systems). However, there have also been disruptions of the old system. Specifically, the shared property rights system, which has been primarily adopted in the field of high technology and new technology, represents an innovative combination of collective ownership with private property rights. In this system, specific employees (mostly scientists, engineers, and computer programmers) become partial owners of the company and share in its income growth; however, when they leave the company, they return their share of ownership to the company.

China’s complex combination of institutions did not suddenly arise; it developed through a gradual trial-and-error approach with the ultimate goal of achieving a win–win solution that achieves both political stability and economic growth. China’s institutional evolution works by retaining key aspects of the old institutions (or changing them slightly) until new institutions become sufficiently strong to replace or improve the old institutions. For example, China’s rural society changed rapidly from 1978 to 1980, but the urban society remained relatively stable. In addition, when a market-based system emerged in the 1980s, allowing competition among companies, the state-owned enterprises that were controlled by the government’s central planning system changed little while private enterprise surged in the private sector. When shared property rights emerged in 1994, the old institutions changed little and coexisted with this new institution. These gradual changes represented evolution and coexistence of the new and old systems rather than revolution.

2.1. Restoration of the system of private property rights

In 1978, Deng Xiaoping drew lessons from the failures of the People’s commune system under Mao Zedong and allowed peasants to operate independently on contracted land (i.e., land owned by the government but managed by farmer collectives), while retaining state ownership of the land and other natural resources. This system was equivalent to the restoration of peasants as sharecroppers. Although that wording makes the system seem like a throwback to older times, it actually corrected the mistakes that were made during the People’s commune period, when the government told farmers what crops to grow and what productivity must be achieved, even if those instructions were unrealistic. Since the new approach eliminated government bureaucratic positions such as the village accountant, cashier, custodian, village head, and secretary, the cost of agricultural production fell. Since farmers also decided what crops would work best in their area and were not forced to meet unrealistic production targets, crop yields and profits both increased. As a result, this reform was successful right from the start of its implementation.

In contrast with the traditional feudal society, Chinese farmers after 1978 no longer had to pay land rent to a landlord after paying agricultural taxes, so the burden on farmers was lower than the burden on traditional tenant farmers. They also shared a form of land ownership by having the freedom to determine how the land would be used. After paying state taxes, all the surplus income belonged to the farmers, which provided a powerful incentive to both innovate and work harder. As a result, China’s grain production increased from 304 Mt in 1978 to 669 Mt in 2020, and other crops benefited similarly (National Bureau of Statistics, 1979-2020; National Bureau of Statistics, 1979).

After successfully completing the reform of rural land property rights, the Chinese government allowed the urban unemployed, migrant farmers, and foreign businessmen to start private business activities in cities, and this approach gradually expanded from commercial to industrial sectors. The 1980s saw the emergence of private-sector enterprises such as private workshops and private enterprises in Chinese cities. This non-public component of the economy promoted the rapid development of a market economy and subsequent reform of China’s market economy. For example, the government’s primary role in the marketplace and the stock market has been to enforce a series of laws that are designed to prevent financial crime. And the private-sector (including enterprises that issued stocks) decided what to produce and sell, and shared the benefits that remained after state taxes.

The private sector grew rapidly. In 1978, there were no private enterprises. By 2019, the number of registered individual businesses reached 25.3 × 106. The urban private sector employed 262.6 × 106 people, accounting for 59.3 % of the urban employed. The GDP of privately owned enterprises reached 88.1 × 1012 RMB, accounting for 87.0 % of the national economic output (Fig. 1). The private sector has therefore emerged as a major force driving China’s economic growth. The great success of the private sector increased Deng Xiaoping's confidence in market-oriented reform, which has continued to the present day.

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Fig. 1

3. Economic principles behind the new Model

The private ownership that characterizes capitalism shares benefits as follows based on costs (C) and net benefits (NB):Productionvalue=∑i=1nCi+∑i=1lNBiwhere ∑i=1nCi includes all costs of economic activity (for example, worker salaries, costs of raw and processed material, losses during production and sales, taxes, and transaction costs) for n costs and ∑i=1lNBi includes the net value of the enterprise’s activities for l activities. Karl Marx (1818–1883) described the latter term as the surplus value enjoyed by financial capital.

In contrast with the private ownership system, the shared property system provides not only capitalism’s net benefits, but also a new shared benefit (SB): a share of the profits. The knowledge workers not only earn salaries, as in traditional capitalism, but also earn a share of the net benefits:Productionvalue=∑i=1nCi+∑i=1lNBi+∑i=1lSBiwhere ∑i=1lSBi is an increased new net value that is created by the knowledge workers. Because the ∑i=1lNBi in model (2) > the ∑i=1lNBi in model (1), and ∑i=1lSBi > 0 in a company that is earning profits, the new institution should be welcomed both by the capitalists and by the knowledge workers.

In the new system, ∑i=1lSBi represents the new and increased benefit created by the knowledge workers in addition to ∑i=1lNBi because the efficiency of labor is increased by the new institutional incentives. Therefore, the evolution of this method does not eliminate traditional capitalism, but rather adds to and improves the old system, and will gradually decrease the old system’s role in the economy. For example, Ren Zhengfei, the founder and current leader of Huawei, owns only 1 % of his firm; the rest is owned by employees in the form of shared property. The company has no “stocks” that are publicly traded in a stock market; instead, its knowledge workers benefit from their shared ownership of the company.

Just as a tree grows new branches in the spring, while retaining its old branches, new institutions emerge from and coexist with the old ones. Instead of completely rejecting capitalism or completely overthrowing socialism, China has developed its innovative shared property rights system while retaining the old system. As Buzan and Cox (2013) note, this represents peaceful economic competition mixed with cooperation (i.e., coopetition). The result is a more gradual change (co-evolution rather than revolution) that smooths socioeconomic development by minimizing conflict between the old and new systems. At the start of this evolution, China maintained strong central control of the economy, while allowing market-based economic activity to emerge and grow (Whyte, 2009).

Currently, all China’s high-tech enterprises (except universities and institutes that are controlled by the central government) use some form of shared property system. Most of these companies are involved in knowledge industries (e.g., telecommunication, computers, design of consumer products). Like the quiet spring rainfall, the changes in China are gentle and easy to miss. This is the essential feature of China’s institutional reform and offers a good example for human society to follow.

4. Achievements

After the founding of the People's Republic of China in 1949, the Chinese government confiscated all private assets and formed a state-owned property rights system dominated by public ownership of all resources. Unfortunately, this led to the majority of the Chinese people being trapped in poverty for decades. However, since 1978, the Chinese government has adopted increasingly flexible and diverse institutional arrangements, such as the re-establishment of private property rights and the invention of shared property rights. These new systems have cooperated with the old systems to maintain social stability and economic growth.

The rapid development of computer and Internet technology has completely changed production techniques and human society. The emergence of new technologies means the emergence of new industries capable of using these technologies, which provide new employment opportunities. Those who work in these new industries and who establish new production relationships (e.g., most of China’s high-tech enterprises now use some form of shared property system) form new social groups that work together to accelerate the pace of institutional evolution (Cao & Yu, 2019). From 1978–2019, 108.7 × 106 college and university students were trained (National Bureau of Statistics 1979–2020), and most of them are now working in high-tech fields or using new technological tools (e.g., computers, the Internet). The shared property rights system has increased their enthusiasm for their work by increasing their share of their employer’s profits, thereby providing direct payback for their efforts.

Some scholars believe that China has made rapid progress in economic development, but that its political institutions have not advanced (Brodsgaard, 2017; Gallagher, 2002). However, this opinion ignores important changes in how the Chinese Communist Party operates; these include delegation of more power to provinces and the establishment of special economic zones such as Shenzhen, where new approaches can be tested. In fact, China’s political reform work began in 1978: on 11 May, GuangMing Daily published an article (“Practice is the Only Criterion for Testing Truth”) that represented an ideological revolution. In summary, the author proposed that social institutions should not be evaluated based on how well they followed the government’s ideology, but rather based on whether the system worked. This represented the beginning of a Chinese ideological change that has also affected the political structure.

The Chinese government has completely abandoned the ideologies of “class struggle” and “dictatorship of the proletariat” from the Mao era. By increasingly empowering local governments, including provinces, cities, and counties (e.g., to sell land to raise money to fund their operations), and by allowing regions such as Hong Kong and Macau some independence so they can follow the capitalist path, the traditional centralized political system is being gradually replaced by a decentralized federal political system in which the central government defines national goals, and each local administration determines which methods are most likely to help them achieve those goals locally (Cao & Ren, 2019). The result is an increasingly diverse political culture that emphasizes innovation rather than adherence to a single unchangeable ideology, with the goal being to build a new society sustained by shared prosperity. This diversified political and cultural environment provides a more relaxed political environment in which more and more institutional innovation is encouraged, such as the adoption of shared property rights and tests of innovative approaches by local governments.

The efficiency of the shared property rights system is that it not only promotes the development of high-tech industry, but also improves the lives of citizens by providing innovative new ways to live, produce, and trade. Between 1997 and 2019, the number of Internet users in China increased from 60 × 104 to more than 85 × 107, increasing from less than 1% of the country’s population to more than 61 %, and this has led to equally rapid socioeconomic change. In 2019, Internet sales reached 31.3 × 1012 RMB, accounting for 76 % of the total domestic retail sales (National Bureau of Statistics 1979–2020), compared with almost zero 10 years ago (Fig. 2). As a result of these changes, China has surpassed the traditional industrial countries and has entered the ranks of high-tech developing countries. As the system of shared property rights grows in popularity, its efficiency will eventually lead to fundamental changes in the political system and continue to guide China toward globalization.

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Fig. 2

Sharing property rights is a major revolution in production relationships. When the knowledge workers who are most responsible for a company’s growth and profits own a piece of the company, their status changes. They are no longer laborers working only for the benefit of a capitalist boss, but co-owners who are also working for themselves. However, since all of these workers share the benefits of innovation, there is also a powerful incentive to cooperate and innovate together rather than independently. Such a production relationship can improve employee motivation to innovate, thus making enterprises more competitive and profitable. In a future society based on shared property rights, older institutions such as state ownership, private ownership, and the traditional stock ownership system can coexist with shared property rights, possibly even in the same enterprise. Those industries that worked well under the old system will not be eliminated but will continue to exist in the new society and will change slowly as they respond to the new environment.

5. China’s experience

Cultural diversity is a core feature of Chinese society (Cao, 2016). During the reform and opening to the west process, China did not reject its traditional culture, as was done during the Mao era, but instead tried to learn from it. Like luxuriant trees, the integration of traditional culture with new forms of culture, some imported from the west and modified to meet Chinese tastes, has maintained social stability, promoted cultural exchanges, and improved the efficiency of social and economic processes. China’s reform of its political system invigorated all aspects of the Chinese economy (Cao & Ren, 2019), resulting in unprecedented economic growth. China’s economic development is one of the biggest drivers of global economic development and international trade (Abraham & Van Hove, 2005; Aoyama, 2016).

Scholars have traditionally studied China's institutional changes from an economic rather than a political perspective by focusing on economic utility rather than on the evolution of production relationships (Hilmawan & Clark, 2019; Pu, 2017). They mistakenly believed that China has neither completed its socialist revolution (Herrmann-Pillath, 2006; Whyte, 2009; Zhao, 2006) nor fully accepted capitalist institutional arrangements (Grabowski, 2007; Meinzen-Dick, 2007). They therefore see China’s current state as a uniquely Chinese (isolated) model that has no universal value.

Our description of the shared property approach suggests that China has found an effective way to combine the strengths of the capitalist and socialist systems to create a new system that has helped to drive China’s rise. The new system is the result of institutional evolution, not revolution, and has therefore minimized social unrest. Therefore, the emergence of the new system does not need to eradicate the old system, but rather must coexist and cooperate with the old system, thereby jointly promoting the development of human society and economic development.

There is no single solution to all practical problems, and shared property rights may not be suitable for all industries. An industry does not need to adopt this new model if their old methods continue to work well. The coexistence of a series of ownership modes is a basic path during the development of human civilization. The shared property rights system does not need to deny the old private and public ownership systems, and can instead continue to grow and evolve until it becomes the dominant approach and one that spreads to other areas of society.

People tend to view and understand the world from a single perspective, including their judgment of the evolution of human society. Some continue to use the simplistic label of “communism” to view China, thus ignoring the capitalist processes that have arisen within China; others continue to ignore the socialist nature of China and focus only on its economic growth, assuming that the Chinese miracle is purely the result of capitalism (Hachigian & Peng, 2010). As we have shown in this paper, the truth lies somewhere between these perspectives.

Although the concept of shared property rights is similar to communist ideology, shared property rights does not exclude the beneficial elements of private ownership and a free market economy. Just as the industrial revolution did not eliminate agriculture, and instead replaced manual labor with mechanized production, shared property rights can improve the efficiency and productivity of the older processes. China has proven through its own experience that shared property rights does not require the elimination of capitalism, but rather emphasizes the need for different approaches to coexist harmoniously in the same country, or even in the same enterprise, through technological and institutional innovation.

Confucius famously observed that “all men are brothers”. The evolution of shared property rights reflects this belief because it emphasizes cooperation and coexistence rather than competition and warfare. The Chinese example provides an alternative to traditional approaches, which emphasized a zero-sum game, by proposing an approach that is more synergistic and more likely to lead to win–win solutions. China’s institutional change is only the beginning of a longer process, not the end. The development of a society based on shared property rights has just started. Whoever takes the lead in perfecting this approach and in adapting it to other areas of human endeavor, such as university education, will become the leader of future human society.

Author contributions

S. Cao designed the research and analyzed the data; S. Cao, C. Xia, and X. Suo wrote the manuscript. All authors have approved the manuscript.