Rhetoric in elite-led radical change: China's capitalist transformation from 1978-2008

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Content RHETORIC IN ELITE-LED RADICAL CHANGE: CHINA’S CAPITALIST
TRANSFORMATION FROM 1978 - 2008

by

Yuan Li

A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)

August 2009

Copyright 2009 Yuan Li

ii

Acknowledgments
This dissertation would not have been possible without the support of my
chairs: Paul Adler and Sandy Green. Paul is the critical interlocutor of my
intellectual pursuit, always pushing me to think harder and strive higher. As the
Harold Quinton Chair in Business Policy and Governor of the Academy of
Management, Paul has inspired me not only with his deep and rigorous
organizational theorizing, but also with his mastery of and openness to diverse
themes and perspectives. Paul’s foresight has shaped my career. Sandy, a Harvard
graduate and a scholar with rare talent, introduced me to the rhetorical institutional
perspective that has kept me captivated. Sandy is a gifted mentor with endless energy
and a caring spirit. He has made doing research joyful. His ingenuity opens up my
mind, his encouragement strengthens my character, and his patience warms my heart.
I owe a great debt of gratitude to my other committee members: Mark
Kennedy and Tom Goodnight. Mark impresses me with his exceptional skills and
creative work. He is generous with his time, patiently challenging and guiding me on
the path of being a mindful researcher. Tom is a world renowned rhetorical scholar,
yet he has no arrogance but sincerity, honesty, and an incredible ability to guide
students in research. Tom has not only taught me rhetoric, but also helped me design
and frame my dissertation. I believe anyone who has the fortune to indulge in
conversations with him will become a better thinker and more productive writer.
An ideal for a student of institutional theory is to learn directly from the
founders. Lynne Zucker has made that dream come true for me. It is my privilege to

iii

be her student. Lynne cultivates my sensibilities in the institutional tradition. Even a
casual chat with her helps me solve questions that I have long struggled.
I would also like to thank Peter Kim, Peer Fiss, Phillips More, and Feng Chen
for coming to my presentations and offering great advice. Carl Voigt, Michael
Coombs, and Jay Kim deserve special thanks for enhancing my understanding of
strategic management. Jenny Tian, Jade Lo, Jane Wu, and Jay Lok as close
colleagues in the department are a wonderful support group for each other’s
academic pursuit.
I have also benefited from support and friendship with professors and
doctoral students outside of my home department. Gene Cooper, Zhichang Zhu,
Richard Gunde, Chris Smith, and Jos Gambles shared my interest in China studies
and provided me with valuable feedback on sections of my dissertation. Yayoi Kato
was always there for a lively and interesting discussion on China. Xueyong Zhan,
Catherine Liu, Catherine Chang, and Siobhan McElduff enriched my perspectives in
their distinctive ways.
I am grateful for Chinese scholars and professors who shared their insights
with me about China’s stock market: Guihua Lu, Maoqing Zhou, Bin Xu, and
Xinong Wang.
I would like to thank the USC Graduate School for their generous fellowship
that allowed me to focus on my dissertation research. Clay Dube, associate director
of the USC U.S.-China Institute, deserves special thanks for providing me with
financial support, and for creating an interdisciplinary platform for exchange of ideas

iv

among China scholars. I am especially grateful for Randa Issa for her warmth. I also
appreciate the help and cheers of administrators at Marshall School of Business:
Grace Rogers, Martha Maimone, and Jennifer Lim.
I would not have completed this dissertation without the sacrifice my parents
made for me. My mother, Shulan Dai, took on the responsibility of taking care of my
son during the last three years of my Ph.D. program. My father, Zuojun Li, was
always there for his grandson. As for my husband, Dizhi Lan, I know I need no
words to thank him. Finally, I want to say sorry to my son, Michael Lan, for the
separation that he had to suffer when he was so young.

v

Table of Contents

Acknowledgments ii
List of Tables vi
List of Figures vii
Abstract viii
Chapter 1: Explaining the Chinese Capitalist Transformation 1
Chapter 2: A Rhetorical Movement Perspective on Elite-Led Change 21
Chapter 3: Casuistry: Moving from Plan to Market 39
Chapter 4: Character: Maneuvering the Leader’s Authority 95
Chapter 5: Controversy: Managing Presumptions 154
Chapter 6: Conclusion 219
Bibliography 234

vi

List of Tables

Table 2.1: Overview of China’s Stock Market: 1990-2007 34
Table 2.2: Rhetorical Movements during China’s 38
Capitalist Transformation
Table 4.1: Selected Coding Examples 133
Table 4.2: Ordinal Logistic Regressions of Rhetorical Genre 139
Table 4.3: A Rhetorical Model of Ethos Construction 142
and Institutional Change

vii

List of Figures

Figure 2.1: Shanghai and Shenzhen Simple Average Index 32

Figure 2.2: Number of IPOs and Total Number of Listed Companies 33

Figure 4.1: Number of Articles on China’s Stock Market in People’s Daily 111

Figure 4.2: Movements of Market Returns around the Special Guest 123
Commentary on Dec. 16, 1996

Figure 4.3: Movements of Market Returns around the Special Guest 129
Commentary on Jun. 15, 1999

Figure 4.4: Trends of Rhetorical Genres 135

Figure 4.5: The Changing Rhetorical Genres of China’s Stock Market 137
from 1990 to 2005

Figure 4.6: A Three Year Moving Average of the Changing Rhetorical 138
Genres from 1991 to 2004

Figure 5.1: Controversies and Institutional Change 159

Figure 5.2: The Rise and Fall of Three Controversies 166

Figure 5.3: Aggressor, Defendant, Leader, and Presumption 213
in three Controversies

Figure 5.4: Trajectory of Institutional Change 214

viii

Abstract

This project investigates China’s capitalist transformation from 1978 to 2008.
While most studies emphasize structural aspects of China’s market-oriented reform,
such as economic, political, and cultural structures, this project examines agency of
the power elites in legitimating such transformation. Elite agency is conceptualized
as rhetorical creativity – innovative articulation of new realities and rationales,
exploiting multiple and potentially conflicting institutional logics to legitimize
change. This project focuses on the introduction and development of the Chinese
stock market and explores how Chinese leaders have theorized and justified a
quintessentially capitalist institution in the name of Marxist and communist
ideologies. Specifically, I discuss three rhetorical dimensions of elite-led radical
change. First, my analysis shows how Chinese communist leaders use casuistry to
stretch the concept of communism to open up space for arguments justifying free-
market practices. Second, I demonstrate how Chinese leaders engage in the
institutional work of ethos construction in order to maintain credibility and trust with
followers. Third, I illustrate how leaders intervene into debates and controversies by
managing presumptions, thus influencing the direction and pace of the transition
from plan to market.

1

CHAPTER 1: EXPLAINING THE CHINESE CAPITALIST
TRANSFORMATION

PRELUDE
A few days ago, I was talking with a neighbor, who was born in the 1940s,
and is now a Chinese immigrant living and working in Los Angeles. As a technician
in his company, he was recently on a business trip to China, the country he had not
visited for years. He told me that he was utterly astonished by the rising number of
rich in China. A private entrepreneur he met at a banquet invested millions in
building new factories, was named one of “Ten Outstanding Young Persons” in his
province and, moreover, was a member of the People’s Congress in his city. “Where
did all this money come from?” My neighbor was both perplexed and angry. In
early years of the communist regime, the government classified his family as
“landlords”, and confiscated his family land. As the offspring of a landlord he
suffered discrimination in almost every aspect of his life. He is an American citizen
now, yet he is furious about the fact that some indigenous Chinese private
entrepreneurs have accumulated massive amounts of wealth and are now admired
socially and politically for their economic achievements. “I am confused,” said my
neighbor: “Isn’t the goal of the communist revolution the elimination of exploitation?
If this is what China has now become, why did we have the communist revolution in
the first place?” My neighbor sighed, “You are a social scientist, can you answer my
question: What kind of a society is China?”

2

I have no simple answers for him. It is March 2009, and I have been busy
working on my dissertation. Unlike him, my frequent travels to China have exposed
me to the latest trends and changes in Chinese culture and society, thus I am not as
overwhelmed and bewildered as my neighbor. But I am equally puzzled, and my
dissertation was in fact trying to address the same set of questions that my neighbor
was asking. A market-based approach, competition, private enterprise, accumulation
of personal wealth – all these capitalist elements have become legitimized in China,
yet China remains under the rule of the Communist Party and continues to proclaim
allegiance to Marxism and communism. This transformation puzzles millions of
Chinese like my neighbor and is a central topic in Western academic research.
This dissertation focuses on the rhetorical aspects of this puzzle. Specifically,
the dissertation consists of six chapters. Chapter 1 outlines prior approaches to
Chinese capitalism, and explains what is missing, what is problematic, and what
motivates this project. Chapter 2 introduces the theoretical orientation of this
dissertation, which draws on some of the approaches reviewed in Chapter 1, but adds
a rhetorical movement perspective. The rhetorical movement perspective sees the
reformist leaders as those that resemble social movement advocates for whom
rhetoric is critical for changing the status quo. Chapter 2 describes three rhetorical
requirements facing the leaders of the rhetorical movement and summarizes the
corresponding rhetorical strategies they employ. This analysis serves as the starting
points for the three essays that follow. The first essay, chapter 3, focuses on the first

3

strategy, which is the rhetorical invention in theory. The second essay, chapter 4,
examines the second strategy, which is the rhetorical invention in the ethos of the
speaker. The third essay, chapter 5, investigates the third strategy, which is the
management of controversies. Together, the three strategies constitute a rhetorical
movement, where the leaders create the space for change through casuistic stretching
of definitions and logical structures, sustain the momentum through manipulating
their characters and ethos, and move the action forward through orchestrating
controversies that reveal deeply held presumptions and reach temporary resolutions.
Chapter 6 concludes the dissertation with discussions on theoretical and empirical
implications of this study for strategic leadership, institutional change, and non-
Western rhetorical practices.

THE PUZZLE
Once a communist country self-isolated from the rest of the world, China has
embarked on a journey of economic reform and opening up to the outside for more
than thirty years. China’s entry into the World Trade Organization in 2001 marked
the success of its reform. Since then, China’s integration into the global economy
accelerated. Today’s China is in sharp contrast to the China of the pre-reform era.
The country now has a blossoming market economy, a vital private sector, and a
vigorous entrepreneurial spirit. It would be hard to deny that China’s current
economy is a radical departure from the prototypical communist model. Most
Western scholars regard China’s economic system as a variant type of capitalism.

4

However, unlike most other transition economies, China continues to
proclaim allegiance to Marxist and communist ideologies. Moreover, in the Western
media, China is often portrayed as a totalitarian, communist regime. Popular anti-
communist sentiment often describes China as a threat to Western democracy and
freedom. Disagreements over what China is persist: Is China communist? Capitalist?
If China is communist, then why does it adopt free market practices? If China is
capitalist, what is preventing it from saying so?
This dissertation focuses on the introduction and development of the Chinese
stock market and explores how a quintessentially capitalist institution has been
legitimated in the name of Marxism. Adopting a stock market symbolizes that the
country acknowledges the fundamental role of market in a social system, and
therefore represents the most radical break with the social system characterized by
central planning and command. Yet a key factor that distinguishes China’s
transformation from similar change in other countries is that the Chinese leadership
has chosen not to break radically from established ideology. The challenge facing
China’s leaders is therefore to create rhetorical fidelity and credibility in the context
of apparent incompatibility between communist ideology and capitalism. Rhetoric
provides actors with the necessary reasons and justifications for actions. It would be
impossible to understand why the Chinese leaders made the choices without
understanding the rhetoric that accompanies the Chinese capitalist transformation.

5

ACCOUNTS OF CHINESE CAPITALISM
How to grapple with China’s massive transformation is a question lying at
the center of studies of contemporary China. Is Chinese capitalism distinct (Redding,
1990)? What kind of capitalism is likely to emerge in the People’s Republic of China
(Redding & Witt, 2007)? How to explain this extraordinary capitalist transformation
(Hamilton, 2006)? What accounts for the China miracle (Huang, 2008)?
Two problems limit the value of much of the prior research. First, most
studies on Chinese capitalism focus on the capitalist forms in China at a specific
point in history. These studies offer a snapshot of what China looks like, but
overlook the process of capitalist transformation. Failing to take a processual view
on China is likely to result in studies that explain why China adopted capitalist
practices at the expense of explaining how this transformation took place.
Explanations of “why” are often limited by the disciplinary base of the scholars, such
as economic, political, or cultural approaches.
Second, and relatedly, prior work has focused on structure rather than agency
in explaining the Chinese transformation. Even when research addresses agency, it
does so only by looking at the structural conditions that permit agency – it does not
offer an understanding of the conduct of agency. For example, research rarely
examines how Chinese themselves navigate the entangled web of the past, present,
and future, and negotiate the direction, action, and authority while moving the
country away from its original state.

6

Below I review four approaches on Chinese capitalism: (1) Weberian cultural
approaches that resort to traditional Chinese belief systems to explain the origin and
characteristics of Chinese capitalism; (2) economic explanations including
fundamentalist market accounts and institutional economics perspectives; (3)
political economic approaches that focus on state-society/government-market
relations; and (4) political party-state approaches that emphasize political factions
and strategic actions of the Chinese leadership.

Weberian Cultural Approaches
In The Protestant Ethic and the Spirit of Capitalism, Weber argues that
Western capitalism has a necessary moral component and this moral component is
premised on religion, specifically the doctrines of seventeenth-century Protestantism
(Weber, 1958 [1904-5]). Weber tested this thesis in another text The Religion of
China: Confucianism and Taoism, in which he compared Confucianism and Taoism
against Christianity and concluded that the religions of China did not bear the
necessary “spirit” for capitalism to independently emerge in China (Weber,
1951[1915]).
Many subsequent works have sought to test Weber’s theory by observing the
development of East Asian countries. The logic for these studies is to identify the
elements in East Asian belief systems that explain the emergence or the absence of
capitalism in East Asian countries (Hamilton, 2006: 5). Based on this logic, a first
generation of scholars claimed that Japan was the only non-Western nation to

7

industrialize quickly because of its unique religious beliefs that other Asian countries
lacked (Bellah, 1957). However, when “miracles” came one after another, such as
Taiwan, South Korea, Singapore, and later, China, scholars once again reviewed the
philosophies and beliefs prevalent in these nations and declared that they indeed
served similar roles as the Protestant ethic in the West. Gordon Redding, for example,
investigated why capitalism “flourished so spectacularly among the Overseas
Chinese” (Redding, 1990: 42). Based on interviews of ethnic Chinese businessmen
in the countries surrounding the South China Sea, he mapped the spirit of Chinese
capitalism by detailing the legacies of Chinese ideas at the level of the self,
relationships, organization and society (Redding, 1990: 83). In a more recent work,
Redding and Witt discussed how the culture or rationales of identity and authority,
undergird organization and exchange forms that Chinese business often takes
(Redding & Witt, 2007).
The Weberian research has attempted to explain Chinese capitalism by
reference to “Chinese” values, beliefs, and logics of social relationships and
organizations. For example, Redding (1990:43) outlines a cognitive map of Chinese
values, of which Confucianism, Taoism, and Buddhism are fundamental beliefs and
values; family, networks, and ethnicity are basic social structures; filial piety,
collectivism/face, limited and bounded trust, and non-cooperation are main
relationship rules, and work ethic, money and frugality, and pragmatism are main
rules for action. This work provides a valuable foundation, but its focus on cultural

8

structures ignores cultural action – how these resources are utilized by actors in
making social change.

Economic Explanations
Chinese capitalist development presents an interesting case for economists.
There are two opposing camps. On the one hand, some transition economists
highlight China’s incrementalist approach and consider the Chinese reforms more
successful than transition economies that adopt a shock therapy approach. On the
other hand, other economists characterize China’s economy as “crony capitalism”
and are critical of the Chinese political system as an impediment to building genuine
capitalism.
The first camp lauds the Chinese reform efforts so far for its GDP growth and
relative political and social stability during the transition. The near consensus view is
that China has developed a unique, country-specific model for economic reform, of
which institutional innovations such as mixed ownership structures, decentralization,
and selective financial controls are conducive for the transition (Stiglitz, 1999;
McMillan & Naughton, 1993). For these economists, China’s case indicates that
economic growth need not conform to universal economic principles.
The opposing camp holds a more negative view of China’s economic
condition. Economists who adhere to classical economic theories consider China’s
economic development as a case that demonstrates what happens when free market
principles are not observed. For these economists, China’s growth is accompanied by

9

a huge amount of institutional inefficiency. The institutional innovations applauded
by the first camp are seen as precisely what is preventing China from developing a
form of capitalism that is similar to the Western model (Huang, 2008). For example,
economist Yasheng Huang notes that what many transition economists regard as
mixed ownership companies, e.g., township and village enterprises (TVEs), are in
fact mostly privately owned. Huang argues that China’s economic reform in the
1980s and 1990s are directionally different. In the 1980s, China more closely
followed financial liberalism, which gave rise to the vital private sector and rural
growth. However, the policy became much less friendly to private entrepreneurs and
rural areas in the 1990s following the Tiananmen incident, which fostered corruption,
a widening gap in wealth, and an unbalanced economy. Huang concludes that
China’s growth was successful when it fostered private property and financial
liberalism, and was failing when it constrained private entrepreneurship and financial
liberalization (Huang, 2008).
In economics, too, the research both critical and laudatory, focuses on
prevailing structures. There is little theory or empirical curiosity for the process of
institutional change.

Political Economic Approaches
Many scholars working in the area of economic sociology have focused on
the relationship between the state and the market, or between the government and the
private economy. Contrary to economic explanations which are anchored primarily

10

on the market, political economic approaches anchor the analysis on the state. States
are seen as the most important institution that frame and constrain economic actions.
Peter Evans probes the role of the state in both facilitating and hindering
industrialization in developing countries by undertaking a comparative study of the
information technology sector in South Korea, India, and Brazil during the 1970s
and 1980s (Evans, 1995). Evans argues that states are successful when they are
agents of economic transformation and that this agency is most effective when the
state enjoys “embedded autonomy.” Embedded autonomy gives the state a degree of
corporate autonomy from social groups, while at the same time, a good working
relationship with capitalists or industrial elites. Evans distinguishes four types of
state roles in economic transformation: 1) custodian; 2) midwife; 3) husband; and 4)
demiurge. The state as custodian provides protection, policing, and regulation. The
state as midwife provides subsidies, tax breaks, and other favorable policies for
certain sectors to support private enterprises. The state as husband cultivates,
educates, and encourages entrepreneurial forces. The state as demiurge shapes
production activities and influences the privatization of industries as they mature
development. He argues that Korea is more successful than India and Brazil at
facilitating the development of the IT sector because the Korean state plays the
“midwifery” and “husbandry” roles, rather than the “custodian” and “demiurge”
roles.
A number of organizational theorists have theorized the relation of the state
to economic organizations (DiMaggio & Powell, 1983; Fligstein, 2001; Hamilton &

11

Biggart, 1988). In contrast to Evans’ approach, which portrays the state as a concrete
actor engaging in relationships, these scholars conceptualize the state as the
institutional context within which firms operate. As the institutional environment, the
state shapes economic actions by providing rationalized frames that account for rules
of economic activities. In a comparative study of the forms of business organizations
in Japan, South Korea, and Taiwan, Hamilton and Biggart (1988: 87) argue that the
ruling regime in these countries all resort to “time-tested, institutionally acceptable
ways of fashioning a system of political power.” Specifically, they emphasize,
In each case, the first independent regime of the postwar era attempted to
legitimize state power by adopting a reformulated model of imperial power of
the kind that had existed before industrialization began. Such a model built
on the preexisting normative expectations of political subjects and contained
an ideology of rulership (Hamilton & Biggart, 1988: 87).

Political economic explanations offer a more sophisticated view on the
state/business relationship than economic explanations. Some critical insights
generated from this approach are that the state and the private sector have shared
interests, can work cooperatively, and that the state provides legitimate rationales for
economic activities. There are some unanswered questions and limitations. First, this
approach portrays the state as an actor, yet offers little explanation as to what
motivates the state to act in a certain manner. For example, why do some states
prefer facilitating the success of private entrepreneurs, while other states view the
private sector with suspicion and hostility? It is difficult to see how these approaches
could answer key questions such as: why did the Chinese state adopted a favorable

12

policy orientation toward private enterprises in the 1980s, and reversed that direction
in the 1990s?

Political Party-State Approaches
In contrast to the Weberian scholars who concentrate on ancient Chinese
ideas, scholars of the political party-state approaches focus on the Chinese
Communist Party and the political system established in contemporary China.
Research in this area regards the trajectory of China’s economic reform as shaped
importantly by the strategic maneuvering of the top leadership and a negotiated
consensus of political agendas within the Communist Party. While these scholars
consider China an authoritarian regime and different than Western democracies, they
are able to go beyond merely denouncing the regime as a nexus of power games
among a few personalities, and are interested in discerning institutionalized
arrangements and relationships that could lead to predictable policy outcomes.
Susan Shirk discussed the “political logic” of China’s economic reform by
looking into the authority relations between the Communist Party and the
government, leadership incentives, bargaining arenas for policy-making, groups
enfranchised in the policy process, and rules for making decisions within the
bureaucratic hierarchy (Shirk, 1993). Shirk argues that China’s path – economic
reform without political reform – refutes the standard wisdom about the rigidity of
communist systems. She concludes that China’s path of economic reform is more
successful than Russia’s path because of two features of Chinese political institutions.

13

First, China’s political institutions are less institutionalized than Russian ones, which
gives the Chinese leaders more flexibility to reconfigure their government and party
practices to policies favorable to economic reform. Second, China’s authoritarian
institutions characterized by “reciprocal accountability” enable China to make
effective progress in at least some policy areas. In comparison, although Gorbachev
established a democratic political authority in the Soviet Union version of economic
reform, the democratically elected legislatures lacked the sense of responsibility that
must come with authority, which led to populist immobilism (Shirk, 1993: 346-350).
Building on and extending Shirk’s approach, scholars have focused on the
political factions within the Communist Party. The factions are fluid and complex,
but permeate Chinese politics across the different eras of party rule. For example, Lai
(2006) described the Maoist (whateverist) versus the pragmatist factions during 1976
to1978 period of transition from the Cultural Revolution to economic reform; and the
reformists versus the conservatives factions during the 1978 to 1992 period of
economic reform (Lai, 2006). Factional politics did not cease after 1992. Researchers
observe the emergence of new factions, specifically the elitist coalition and the
populist coalition, during the transition from the Jiang Zemin-Zhu Rongji regime
(1989-2002) to the Hu Jintao-Wen Jiabao regime (2002-2012) (Li, 2005).
The strength of the political party-state explanations is that they detail the
pattern and nature of networks and associations among top party leaders, thus
focusing attention on the motives of political leaders and the reasons some
politicians and social groups bind together and others divide. A fine-grained

14

understanding of the evolving political institutions in China helps understand policy
changes.
The weakness of this approach is that it is concerned with material interests
and relationships of political actors. This approach is one-sided in ignoring the
contributions of symbols and language. These latter are particularly important in
China, as China has a rich history of statesmanship and political maneuvering
through discourse. Scholars observe that “real power in China was often displayed
subtly (Pye, 1981),” and that “factional conflict was often waged in political
discourse and in subtly different political terms (Baum, 1996).” Therefore, a more
complete understanding of the policy process of the Chinese political institutions
requires an analysis of the discourses of political actors and the symbolic meanings
that are part of political action.

INSTITUTIONAL STAGES OF CHINESE CAPITALIST DEVELOPMENT
From the perspective of institutional rhetoric, the Chinese capitalist
transformation has four stages of development. The monumental event for the first
stage was the speech delivered by Deng Xiaoping in the Third Plenum of the
Eleventh Party Congress in 1978. The transformative event for the second stage was
the series of talks Deng Xiaoping gave during his southern tour in 1992. The
directional turning point for the Chinese Communist Party (CCP) that started the
third stage was the speech given by Jiang Zemin in the anniversary of the CCP in

15

2001. Finally, the year of 2004 represented the start of a new era for the image of
China in the context of globalization.

1978: Declaration of Reform
The year 1978 is featured in all accounts of China’s reform, when the Third
Plenum of the Eleventh Party Congress was held for five days from December 18 to
22. It was a turning point for the CCP and the country. Specifically, the CCP
officially abandoned the priority of class struggle, and for the first time placed
economic development at the center. A few days before this Party Congress, on
December 13, Deng Xiaoping delivered a speech at the Working Conference by the
Central Committee of the CCP, titled “Liberalizing Thoughts, Seeking Truth from
Facts, Uniting Together and Looking Forward.” This speech became the keynote
speech at the Party Congress. Jiang Zeming, officially regarded as the second
generation of the “leading core” of the CCP and the country, said in his Report at the
Fifteenth Party Congress in 1997 that this speech made by Deng Xiaoping was “the
declaration of a new era.” The topics that Deng covered in his speech became the
fundamental guidance for policy making.
The declaration of reform by Deng Xiaoping was a decisive moment that
came after two years of extreme uncertainty regarding the direction of China. In the
two year period after the Cultural Revolution in 1976 and before the formal
announcement of reform in 1978, the top leadership was divided into two factions,
one faction was commonly referred to as the “whateverists,” who attempted to

16

continue Mao’s direction, the other faction was regarded as the “practice” camp, who
advocated reform. Intensive political struggles took place at the very top of the CCP,
between Deng Xiaoping and his allies, and Mao’s successor Chairman Hua Guofeng
and Mao’s loyalists. It was only after Deng and his allies defeated and removed Hua
and Mao’s loyalists from the top positions of the CCP and the government that the
CCP began to converge on the ideological orientation of the reformers.
The struggle between the “whateverists” and the “practice” camps is
commonly regarded as the struggle that ultimately led to the transition from planned
to market economy. This struggle took the form of a debate between two different
ideas and ideologies. The debate was theoretical and philosophical to the extent that
the Chinese describe the reform as “starting from philosophies,” and that “published
articles saved the country.” It was astonishing how powerful one article could be. A
senior Chinese journalist accurately described China in the 1980s as “idealist,”
“youthful,” and “enlightening” (Ma, 2008). In the 1980s, the key terms were: reform,
liberation, and individuality.

1992: Rectification of the Market Economy
The 1980s was characterized by a strong sense of emotion and idealism.
Student demonstrations in pursuit of liberalization and progress reflected the idealist
climate. However, the Tiananmen incident in 1989 backfired and was followed by
the rise of reactionary forces that defended the socialist planned economy and
attacked reform. Although Deng Xiaoping himself had talked about a market

17

economy for years, and emphasized the importance of the market economy in several
speeches after 1989, Chinese leftists had been extremely critical of the adoption of
market practices, charging that these practices were an ideological violation of
Marxism. The top leadership of the CCP did not have a unified and clear vision
about the direction of the country.
Deng Xiaoping was confronted with a dilemma. On the one hand, he
disagreed with the student demonstrations which were requesting political
democracy. But on the other hand, he was committed to economic reform and
disagreed with the Old Left on issues about the market system. Deng Xiaoping’s tour
of southern China in the spring of 1992 symbolizes another important moment for
the capitalist transformation of China. At the time when Deng made his tour, he had
retired from all official positions in the CCP, the government, and the military. In a
sense, he did not possess any formal power. However, the situation in China at the
time, called for critical intervention from the paramount architect of the reform. As
one senior journalist observed, the series of speeches he gave during his tour of the
south in the spring of 1992 were regarded by many Chinese as the culmination of his
theory; they represented Deng’s most significant contributions to China’s economic
transformation; and they enabled a complete change in China’s economic system
(Ma, 2008: 154).
Deng’s speeches helped turn things around. Jiang Zemin, the Chief Secretary
of the Party at that time, proposed a new phrase – socialist market economy – to
describe China’s economic system at a speech he gave to the anniversary of the CCP

18

on June 9, 1992. This phrase diffused quickly, and was firmly enshrined in the
Report of the Fourteenth Party Congress in October, 1992. Deng’s speeches and
Jiang’s Report decisively set China on the road to a market system.

2001: Transformation of the CCP
Jiang Zemin succeeded Deng Xiaoping as the leading figure of the CCP and
delivered the Party Report in three Party Congresses: the Fourteenth Party Congress
in 1992; the Fifteenth Party Congress in 1997; and the Sixteenth Party Congress in
2002. Critics regard Jiang Zemin’s speech at the anniversary of the CCP in 2001 as
the most decisive (Ma, 2008). In that speech, Jiang formally articulated his theory of
the “Three Represents.” The most creative part of this theory is that it acknowledges
the legitimacy of new social strata that accumulated significant personal wealth as a
result of the reform, such as private entrepreneur, managers, and professionals.
Jiang’s theory provides justifications for those social groups to join the CCP. To
have private entrepreneurs join the CCP represents a radical break with the principles
of the CCP, since private entrepreneurs were often seen as capitalists.
Western observers commented that Jiang’s speech was another version of
what Khrushchev had proposed in Russia. Jiang’s speech was an attempt to maintain
the CCP’s control by having capitalists in the Party, and that it was an important step
for the CCP to move out of its class base (Ma, 2008). Domestic critics attacked
Jiang’s theory as surrender to private capital and a violation of the Party Constitution.
Some senior Party members wrote public letters to the CCP, criticizing Jiang’s

19

theory as a version of reformist Marxism, as capitalist, and ideologically wrong. The
leftist charges did not garner much support. Jiang’s theory of the “Three Represents”
was featured in the Party Report in the Sixteenth Party Congress in 2002 and was
also written into the Constitution of the CCP. Jiang’s speech is seen as the most
dramatic turning point for the CCP. It indicates the decision of the CCP to put
ideology aside wherever and whenever it impeded the capitalist development of
China’s economic system. After this speech, China’s capitalist transformation
accelerated. Protection of private property was written into the Constitution and
private entrepreneurs were regarded as heroes and role models.

2004: Peaceful Rise of China
The year of 2004 represented the rise of the “China model” (Zhang, 2005).
The top leadership of the Party proposed the concept of the “peaceful rise” of China.
Part of the idea of the “peaceful rise” was to let the rest of the world share the
benefits of China’s economic development. Free trade with neighboring countries
was encouraged and elevated as a strategic policy. Correspondingly, the discourse of
the “China miracle” was propagated by some Western commentators to counter the
discourse of the “China threat.”
In sum, China’s capitalist transformation is characterized by a process of
radical reform punctuated with periods of retraction. Over the course of 30 years,
China has transformed from a socialist, centrally planned economy to a market
economy deeply embedded in the global capitalist economy. Every big jump in this

20

transformation is preceded by extensive theorizations which provide justifications for
action. The premise of this dissertation is that understanding the rhetoric of this
institutional transformation is the starting point for theorizing how China has become
the way it is.

NEW APPROACHES
Nascent research on Chinese rhetoric, communications and media studies
represents a new perspective on China’s transformation. Specifically, Kluver (1996)
and Lu and Simons (2006) have offered accounts of the process and strategies by
which top leadership have wrestled with the contradictions and tensions inherent in
the transformation. In two influential volumes, Media, Market, and Democracy, and
Communication in China, Zhao provided rich and subtle accounts of the evolving
relationship between the Party, the Chinese media, and the Chinese public sphere
(Zhao, 1998, 2008). My dissertation builds on this line of research, but adds an
institutional lens to the story of China’s capitalist transformation.

21

CHAPTER 2: A RHETORICAL MOVEMENT PERSPECTIVE
ON ELITE-LED INSTITUTIONAL CHANGE
China’s change is in no small measure the result of “institutional
entrepreneurships” exercised by key, powerful actors. However, most studies of
institutional entrepreneurs focus on actors who are at the periphery of the
organizational field (Leblebici, Salancik, Copay, & King, 1991), are migrating from
another field (Boxenbaum & Battilana, 2005), or occupy lower positions in the
bureaucracy (Battilana, 2006). Actors who occupy the center and top positions of a
mature field are regarded as less likely to initiate radical change. The reason is
simple: actors whose authority and status are supported with current institutional
arrangements have the least incentive to initiate radical institutional change, because
such change may threaten their established power, positions, and legitimacy within
the system. By contrast, actors who do not possess institutional authority are less
bounded by existing rules, orders and justifications for the status quo, and thus it is
easier for them to act as the change agent. Consistent with this insight, studies on
social movements focus on movements initiated by peripheral, marginalized, and
disenfranchised actors. As Gamson laments, for many social movement advocates,
the only thing they have is a sense of injustice of the existing social order (Gamson,
1975). In fact, from a rhetorical perspective, these social movement advocates have a
rhetorical advantage for initiating radical change, since it is rhetorically consistent
for them to question the current order.

22

While both the institutional literature and the social movement literature
suggest that actors who are at the center and top of an institution are more embedded
and therefore more constrained than peripheral actors by the logics and reasons that
justify the existing order, a few scholars have studied cases of institutional change
led by the power holders. Institutional scholars Greenwood and Suddaby examined
how the big five accounting firms decided to restructure the accounting field, noting
that the top players have the advantage of being exposed to multiple fields and
logics, and therefore are better positioned to perceive the need for change
(Greenwood & Suddaby, 2006). Rhetorical scholar David Zarefsky studied President
Johnson’s War on Poverty as a rhetorical movement initiated by the political power
structure, arguing for a revision of the previous wisdom that movements can only be
initiated by insurgent forces of minority groups (Zarefsky, 1977).
Building on these ideas, my dissertation contributes to the study of elite-led
institutional change. China’s transformation demonstrates that it is possible for the
power elites to change radically the social order without losing power or completely
removing previous policies. To achieve such a result, the power elites must be
skillful in their use of rhetoric.

ELITE AGENCY IN THE CONTEXT OF TOP-DOWN MOVEMENT
China’s transformation provides an empirical site for examining how power
elites use rhetoric to initiate institutional change under conditions of enormous
symbolic constraint. Scholars suggest that analysis of rhetoric and discourse is

23

particularly useful for addressing the symbolic aspect of institutionally embedded
agency (Green, 2004; Green, Li, & Nohria, 2009; Maguire, Hardy, & Lawrence,
2004; Phillips, Lawrence, & Hardy, 2004; Suddaby & Greenwood, 2005). A
rhetorical perspective is uniquely suited to address the question of institutionally
embedded agency because rhetoric describes how actors articulate new realities by
exploiting creatively multiple and potentially conflicting premises and shared belief
systems (Green, 2004; Green et al., 2009).
The perspective adopted here views rhetoric as contributing to the
constitution of social reality as opposed to mere reflections of reality (Alvesson &
Karreman, 2000). As such, rhetoric is critical to the social construction of knowledge
about that reality (Berger & Luckmann, 1966). Within this paradigm, I propose that
elite-led institutional change assumes the characteristics of a rhetorical movement.
To view institutional change as a rhetorical movement (1) highlights the rhetorical
dimensions of agency demonstrated by movement actors; and (2) acknowledges that
institutional change is like any movement, progressing through stages. These stages
typically include initial moments, momentum, and culmination (Griffin, 1952).

Rhetorical Agency
There are many ways in which agency is manifested. This dissertation
focuses on the rhetorical dimension of creativity. Based on this perspective, state
actors exert agency when they use persuasion, rather than material power. This is not
to suggest that the use of persuasion and material power stands in opposite. Nor is

24

this to claim that one cannot use material power rhetorically. Agency is rhetorical in
the sense that agency resides in the actor’s intention and ability to motivate.
Rhetorical agency has three characteristics that connect institutional change
with movements. First, Rhetoric is an instrumental discourse aiming at persuasion
(Bizzell & Herzberg, 1990; Gill & Whedbee, 1997; Herrick, 2005). Moreover,
rhetoric is a mode of altering reality through mediating thought and action (Bitzer,
1968: 4). In achieving the pragmatic task of producing action or executing change in
the world, the rhetor employs a discourse that engages the audience so as to effect
change in the latter’s thought and action (Bitzer, 1968: 4). A social movement is a
collectivity that mobilizes for action to implement a program for the reconstitution of
norms or values (Smelser, 1962; Turner & Killian, 1957). Combining rhetoric and
movements, I use the concept of rhetorical movements to indicate a strong sense of
intentionality encapsulated in language as well as an identifiable group of actors.
Institutional change is the result of purposeful actors mobilizing symbolic resources
to change the meaning system (Rao, Morrill, & Zald, 2000). The Chinese state actors
engaged actively in persuasion to move the country from central planning to a
market-based economy.
Second, theorists have argued that rhetoric is political in nature since it
always aims to influence power (Bizzell & Herzberg, 1990; Gill & Whedbee, 1997).
This is consistent with the conceptual implications of the movement metaphor: social
life is political. Movement rhetoric is political because it participates in power
conflicts. This emphasis on politics has important implications for the study of

25

institutional change. Institutional scholars have conceptualized institutional fields as
consisting of multiple political projects undertaken by actors with varying degrees of
power (Brint & Karabel, 1991; Fligstein, 1997). Fligstein argues that the ability to
form a successful movement depends on political maneuvers such as the ability to
build a political coalition around a collective identity (Fligstein, 1996). Strategic use
of rhetoric in these activities plays an important role in successfully building
coalitions and appealing to important constituencies. The Chinese state actors dealt
skillfully with power struggle within the state apparatus as well as with other social
groups.
Third, rhetorical movements highlight the role of audience. Like movement
advocates, institutional entrepreneurs need to enlist participants and attract
agreement and sympathy from the audience. They face rhetorical contingencies that
impose restrictions on their strategic choices and resource mobilization techniques.
The repertoire of cultural arguments that they have access to is contingent on the
rhetorical situation, i.e., the expectations of audiences about what is appropriate for
the rhetor to say. The Chinese state actors faced multiple audiences, including
internal opposition from the top Party members, opposition from Party members
lower in rank, domestic Chinese who were not a member of the Communist Party,
and international audiences. The Chinese state actors had to speak to multiple
audiences.

26

Stages of a Movement
A rhetorical movement perspective emphasizes that movement is a process,
and suggests that movement has a trajectory characterized by stages with distinctive
rhetorical forms. In a foundational essay on the rhetorical evolution of movements,
Griffin noted that movement develops from a period of inception when rhetoric spurs
the public to take notice, through a period of rhetorical crisis when opposing groups
challenge previously held assumptions, and to a period of consummation when the
movement efforts cease either because they have successfully achieved the goal or
failed to do so (Griffin, 1952).
Since Griffin’s work, many scholars have studied the rhetoric of social
movements. One important insight is the recognition that movement is essentially
rhetorical/symbolic (Cathcart, 1972; Simons, 1970; Wilkinson, 1976). Wilkinson
defines movement as “languaging strategies by which a significantly vocal part of an
established society, experiencing together a sustained dialectical tension growing out
of moral (ethical) conflict, agitate to induce cooperation in others, either directly or
indirectly, thereby affecting the status quo (Wilkinson, 1976).”
Cathcart and other scholars identify confrontation as the unique rhetorical
form that characterizes movement rhetoric (Cathcart, 1978; Scott & Smith, 1969).
While some scholars elaborate on the moral (Burgess, 1968) or psychological (Lake,
1983) implications of confrontational rhetoric in movements, other scholars probe
how oppositional arguments in a social controversy, contest taken-for-granted
understandings and consequently shape legitimacy in the public sphere (Olson &

27

Goodnight, 1994). Here confronting each other’s premises serves important
cognitive functions as it disrupts institutionalized reasons.
A further extension of the study of movement rhetoric is the development of
the concept of rhetorical movement. The concept of rhetorical movement allows
scholars to study programs that are not conventionally regarded as social movements.
Zarefsky’s (1977) study of President Johnson’s War on Poverty demonstrates that
movements are not confined to the activities of minority or subaltern groups.
Consistent with the broad definition of rhetorical movement, rhetorical theorists have
examined a broad range of campaigns and institutional change, from President
Clinton’s rhetoric (Goodnight & Olson, 2006) to stock market bubbles (Goodnight &
Green, 2008).

Rhetorical Requirements and Strategies of Elite-led Institutional Change
This dissertation uses the rhetorical movement perspective. It conceptualizes
China’s transformation as a rhetorical movement that re-embeds modern markets in
China’s communist political structure. I introduce three dimensions of this rhetorical
movement, (1) argumentative space; (2) legitimate authority; and (3) oppositional
arguments. These three dimensions constitute the “rhetorical requirements” for the
leadership of a movement. Rhetorical requirements refer to the imperatives and
functions that movement leaders must fulfill (Simons, 1970).
The first rhetorical requirement is to create the space necessary for leaders to
initiate a discussion and propagate new arguments. Given that the Chinese leaders

28

chose to maintain the communist and Marxist ideology, the building of a capitalist
stock market became a controversial act, one that cannot easily be justified. To
initiate such a controversial idea, the state actors needed to first “unfreeze” the
communist belief system in order to create a ground for argumentative engagements.
Unless a regime wants to initiate change solely by force, it must first create space in
public sphere where the taken for granted boundaries of arguments get amended.
The second rhetorical requirement is the maintenance of leaders’ own
legitimate authority. This is perhaps unique for elite-led radical change. Once an
argumentative space opens up, the resulting argumentative engagement becomes
uncertain. It is possible that leaders’ own authority is subject to public doubt and
interrogation. If leaders fail to adjust their characters and credibility to the new
situations, they face the danger of completely losing legitimacy and power.
Moreover, leaders may lose the momentum of the movement. Crisis, unpredictable
shifts in policy orientations and instability will ensue. Therefore, to sustain the
momentum of the movement, the leaders need to maintain the followers’ trust.
The third rhetorical requirement is dealing with resistance. Simons discusses
how grass roots movements react to resistance by the established structure (Simons,
1970). I argue that when the establishment engages in radical change, it too must
deal with resistance. Resistance may come from the within the establishment or from
other social groups. Resistance may take the form of urging a return to the past, or
criticizing the change as too fast, too slow, incorrect, or immoral. Failure to manage
oppositional arguments in public controversies can derail the change effort.

29

In three essays – chapter 3, 4, and 5, I discuss discursive strategies the
Chinese leadership employs to fulfill these three rhetorical requirements,
respectively. Chapter 3 introduces casuistry as a rhetorical technique leaders use to
create an argumentative space. The Chinese leadership invented slogans and catch
phrases that linked the past with the future, the traditional with the modern, and the
socialist with the capitalist. Their theorizations were sufficiently ambiguous and
blended to allow for multiple interpretations. Through casuistic rhetoric, they
signaled to the public their willingness to open up a space for public debate and
deliberation. Casuistry enabled the Chinese leaders to create justifications that
promoted radical change while remaining faithful to old principles.
Chapter 4 explores the rhetoric that leaders employed to reconstruct their
character and credibility so as to maintain the trust of their audience. As the
rhetorical movement progresses, leaders need to take on different ethos and character
in order to sustain effective change. Aristotle’s framework of rhetorical genres
suggests three generalized ethos types: the teacher, the prosecutor, and the manager.
Chinese leaders adopted the rhetorical genres that are characteristic of these three
ethos types in different phases of the stock market development. The rhetorical
manipulation of legitimate authority helped sustain the momentum of the movement.
Chapter 5 traces three major controversies among high-profile Chinese
economists during the course of the stock market development. Controversies are an
enduring feature that accompanies China’s transformation; they are inevitable
because opening up the argumentative space invites oppositional arguments. This

30

chapter discusses the topics of each controversy with the goal of identifying the
progressive shift in presumptions. It is, after all, precisely this shift that constitutes
institutionalization. Effective management of controversies is crucial to the process
of reaching a resolution.
In this dissertation, China’s Party-state actors are portrayed as the movement
rhetor. This is not to say that China’s transformation is the result of agency that only
comes from the power elites. Many scholars have argued forcefully that China’s
transformation is largely the effort of millions of unknown farmers via a massive
movement that is spontaneous, unorganized, and leaderless (Kelliher, 1992; Zhou,
1996; Zhu, 2007). I am sympathetic to their arguments. The emphasis of my
dissertation on elite agency does not preclude their arguments. Many agents,
including peasants, low-ranking Party members and bureaucrats, private
entrepreneurs, journalists, and intellectuals contributed to the articulation of the
visions, theories, reasons, and arguments for each step taken on the way. All of these
agents are regarded as the rhetor for the movement. I use the concept of elite agency
to indicate the creativity in rhetoric.

THE RISE AND INSTITUTIONALIZATION OF CHINA’S STOCK
MARKET
China’s stock market has its origins in informal, over-the-counter markets in
mid-1980s, but Chinese citizens have started purchasing shares voluntarily as early
as the year 1980 (Li, 2001). The blossoming stock markets were fueled by thousands

31

of companies issuing shares during 1986-1988 (Green, 2003). By 1989, it was
estimated that up to 10,000 companies had issued shares (Economist, 1989). The
official stock markets in China, including the Shanghai Stock Exchange and the
Shenzhen Stock Exchange, opened for trading in 1990.
Deng Xiaoping, the most powerful man in China and the “General Architect”
of China’s reform, was unsure how the stock market would develop when he gave
his assent to build the stock market. Today, China’s stock market is one of the most
successful stock markets among transitional economies. It has outperformed the
markets of most other transitional economies, on the bases of standard measures of
stock market performance, including the number of listed firms, market
capitalization, liquidity, and fundraising capacity (Pistor & Xu, 2005; Wong, 2006).
Figure 2.1 graphs changes in the Shanghai and Shenzhen stock exchanges simple
average index from their start to 2005. Figure 2.2 graphs the number of IPOs and the
total number of listed companies from 1990 to 2007. Table 2.1 summarizes the
growth of China’s stock market since its inception.

32
FIGURE 2.1: Shanghai and Shenzhen Simple Average Index

0
1000
2000
3000
4000
5000
6000
7000
8000
1990/12…
1991/6/19
1991/12…
1992/6/19
1992/12…
1993/6/19
1993/12…
1994/6/19
1994/12…
1995/6/19
1995/12…
1996/6/19
1996/12…
1997/6/19
1997/12…
1998/6/19
1998/12…
1999/6/19
1999/12…
2000/6/19
2000/12…
2001/6/19
2001/12…
2002/6/19
2002/12…
2003/6/19
2003/12…
2004/6/19
2004/12…
2005/6/19
2005/12…
Index Value

33
FIGURE 2.2: Number of IPOs and Total Number of Listed Companies

0
200
400
600
800
1000
1200
1400
1600
1800
0
20
40
60
80
100
120
1990/4
1991/2
1991/4
1992/2
1992/4
1993/2
1993/4
1994/2
1994/4
1995/2
1995/4
1996/2
1996/4
1997/2
1997/4
1998/2
1998/4
1999/2
1999/4
2000/2
2000/4
2001/2
2001/4
2002/2
2002/4
2003/2
2003/4
2004/2
2004/4
2005/2
2005/4
2006/2
2006/4
2007/2
Year/Quarter
Number of IPOs Total Number of Listed Companies

34

TABLE 2.1: Overview of China’s Stock Market: 1990-2007

Year

No. of
Listed
Companies
(A, B-
share)

Total
Amount
of
Capital
Raised
(RMB
Billion)

Number
of
Investor
Accounts
(Millions)

Total Number of Shares
(Billion)

Market Capitalization
(RMB Billion)

Trading
Volume
(RMB
Billion)

Total
Market

Negotiable

Total
Market

Negotiable

90
10 1.81 0.12 0.26 0.11 5.10 - 2.62
91
14 1.38 0.26 0.63 0.37 12.60 - 4.45
92
53 22.14 2.17 6.89 2.12 96.40 - 68.13
93
183 45.92 7.78 38.77 10.79 353.20 86.16 366.70
94
291 15.56 10.59 68.45 22.60 369.06 96.89 812.76
95
323 7.53 12.42 84.84 30.15 347.43 93.82 403.65
96
530 29.59 23.07 121.95 42.99 984.24 286.70 2,133.22
97
745 91.56 33.33 194.27 67.14 1,752.92 520.44 3,072.18
98
851 82.85 39.11 252.68 86.19 1,950.56 574.56 2,354.43
99
949 86.46 44.81 308.90 107.97 2,647.12 821.40 3,131.96
00
1,088 161.05 58.01 379.17 135.43 4,809.09 1,608.75 6,082.67
01
1,160 109.80 66.50 521.80 181.31 4,352.22 1,446.32 3,830.52
02
1,224 81.20 68.82 587.55 172.77 3,832.91 1,248.46 2,799.05
03
1,312 79.61 70.25 642.85 193.15 4,245.77 1,317.85 3,211.53
04
1,373 83.58 72.11 727.77 257.72 3,705.50 1,170.36 4,256.11
05
1,378 33.90 73.25 715.67 252.46 3,243.00 1,063.05 3,166.48
06
1,432 214.33 78.52 1,265.54 349.02 8,940.39 2,492.79 9,047.03
07
1,530 778.74 92.01 1,693.90 489.38 32,714.09 9,307.13 46,020.00

35

Although successful from today’s standpoint, the institutional development of
the stock market is characterized by huge price fluctuations, bubbles, and intensive
administrative control. During the 1990s, the price fluctuated rapidly, which was
attributed to speculative trading. The ratio of the highest to lowest values of the
indices for Shanghai Stock Exchange Composite Index reached 4.88 in 1992 and
2.45 in 1996, and that ratio was 2.45 and 4.84 for Shenzhen Stock Exchange
Component Index in the equivalent years. The average volatility of DJ China is
51.10 percent from 1994 to 2001, comparing to DJIA’s 15.80 percent and Nikkei’s
20.80 percent in the same period. That volatility is also much higher than the DJ
World Emerging Market’s 27.92 percent (Gao, 2002).
The price volatility in China also reflected that investors were overly
sensitive to the government’s administrative intervention. Many observers note that
various administrative proclamations may explain well the extraordinary peaks and
troughs in trajectories of the A-share indices (Ma, 2004). For example, China’s
reform architect Deng Xiaoping toured the prosperous southern part of China in the
Spring of 1992 and spoke about “boldly speeding up China’s reform” and “being
committed to the stock experimentation”, the stock market responded by rising
fourfold in indices in five months, hitting its first price peak. After almost two years
of such a bear market, on August 1, 1994, the government issued the “three clauses
of market saving policies,” namely, stopping new IPOs, raising capital for securities
institutions, and founding fund companies. The Shanghai Stock Market Composite
Index, which reached its lowest value, 325.89 on July 29, jumped to 1052.94 on

36

September 13, an increase of 3.23 fold in 44 days! In May 1997, both stock
exchanges reached new all time highs, in anticipating the return of Hong Kong to the
mainland. Many believe that government policy is the dominant factor in the
movements of the Chinese stock market and the direct trigger for the bull market in
1996 and 1998 (Yao, 1998).
The government has employed a variety of administrative and economic
measures to influence the market. For example, lifting the stock price limits in May
1992 caused prices to go up, approving institutional investment in the stock market
in February 1993 caused prices to rise. Extending the quota of new listings and
normalization of financial regulation led to a price trough in July 1994. Announcing
new listings and increased quantity of government bonds issued led to prices going
down in Feb 1995. Halting government bond transactions caused stock prices to
jump in May 1995. Expanding outstanding shares caused prices decline in Jan 1996.
Reducing the deposit interest rates pushed prices high in Nov 1996. Allowing
investment of funds from insurance companies and capital of trust and investment
institutions in the shares market pushed prices to reach the high points that they did
in 1999. Inspecting and punishing fraudulent trading and peddling misleading
information, and reducing state-owned shares had depressed the market until 2005.
The government has also changed frequently the stamp tax as a measure to influence
the market.
A market is “not simply an allocative mechanism but also an institutionally
specific cultural system for generating and measuring value” (Friedland & Alford,

37

1991). In China’s stock market, the price of the stocks does not reflect the underlying
value of the stocks. Segmentation of the shares, government control of the quota and
price of new share issuance, and the weak legal protection of investors generated
rent-seeking behaviors by local governments and state-owned-enterprises (SOEs) to
manipulate the market. As a result, Chinese traders bought and sold shares on the
basis of speculation rather than underlying values. In China’s context, the valuation
of a specific stock has often little to do with the economic performance of the
company, but is closely linked to how the overall market is valued. Policy discourse
has actively influenced the value of the stock market.
Therefore, to understand the institutionalization of China’s stock market, I
aim to outline the rhetorical movement driving the market reform in general and the
stock market in particular. The timeline listed here is not intended as a
comprehensive list of events in relation to China’s stock market. Experts in China’s
stock market have created many such kinds of lists (Green, 2003; Walter & Howei,
2006). Rather, my list complements theirs in that I outline the four turning points of
Chinese capitalist transformation, and put together key slogans, oppositional
arguments, and ritualistic events that embodied and engineered those institutional
changes. Table 2.2 serves as a reference for the institutional change and its
accompanying rhetoric discussed in this dissertation.

38

TABLE 2.2: Rhetorical Moves during China’s Capitalist Transformation
Year Rhetoric
1978 Deng Xiaoping’s speech is the declaration of reforms
1981 Mao Zedong Thought is not Mao Zedong’s thought
1982 Planned economy as primary, market mediation as auxiliary
1982 …labor’s individual economy…are necessary and beneficial complements to the
public ownership system
1983 Socialism with Chinese Characteristics
1984 Planned commodity economy
1987 Primary stage of socialism
1987 The state mediates the market, the market guides the enterprises
1987 Public ownership system has many forms: all-people ownership, collective
ownership, public ownership jointly established by all-people and collective
ownerships, public ownership with various regions, departments, and enterprises
buying each other’s shares
1992 The debate between the conservatives and liberal reformers over whether the
stock market was capitalist created uncertainty over the direction of reforms
1992 Capitalism also has planning, …socialism also has a market. …Both planning
and market are economic means…
1992 Jiang Zemin’s slogan “Socialist Market Economy” is the declaration of
China’s economic system
1992 The public ownership system is the main body, …different economic forms can
jointly operate in many ways
1996 Special Guest Commentary in the People’s Daily accused SOEs for manipulating
stock price
1997 Public ownership system economy includes not only state-owned economy and
collective economy, but also the state-owned elements and collectively-owned
elements in the mixed ownership system economy.
1997 There should not be generalized statements about whether the shareholding
system is public-owned or private-owned; the key is to see who has the
controlling right of shares.
1999 Special Guest Commentary in the People’s Daily talks about action plans
2000 The debate between economists Wu Jinglian and Li Yining over whether the
stock market is worse than a casino created uncertainty over the direction of
reforms
2001 Private entrepreneurs can become members of CCP as representatives of
the advanced production force [Jiang Zemin]
2004 The debate between economists Lang Xianping and Zhang Weiying over whether
managers were abusing state assets created uncertainty over policy directions.

39

CHAPTER 3: CASUISTRY: MOVING FROM PLAN TO MARKET

China has orchestrated a gradual move from an economic system based on
central planning to a market. Ironically, China’s leaders insist this move is based on
the founding principles of the country. Some believe this stated fidelity to the
founding principles are simply paying lip-service to those principles. However, I
argue that this claim of fidelity serves important rhetorical functions, such as
providing legitimacy for change, facilitating stability, and affirming solidarity.
Moreover, scholars suggests that when leaders fail to consider the importance of
rhetoric in initiating change they often place the successful implementation and
acceptance of new programs and practices at risk (Eccles & Nohria, 1992).
How have China’s leaders created justifications for the move from a
centrally planned economy to a market economy without abandoning Marxism and
communism? This essay examines the move from plan to market in China’s official
rhetoric. Understanding how changes in symbols are correlated with changes in the
material world is important because symbols, reasons, and arguments co-evolve with
organizational arrangements, practices, and forms. However, studies on China’s
market-based reform focus mainly on changes in material factors, such as economic
conditions, property rights, material resources, and network characteristics (Nee,
1992). With few exceptions scholars have emphasized material changes at the
expense of symbolic changes that underlie the transition from plan to market.

40

This study uses the rhetorical concept of casuistry to explain the movement
between two opposing institutional logics: the logic of plan to the logic of market.
Casuistry is a rhetorical strategy that balances contradictions and creates new
perspectives (Carlson, 1992). Kenneth Burke defines “casuistic stretching” as a
rhetorical method wherein “one introduces new principles while theoretically
remaining faithful to old principles” (Burke, 1984 [1937]: 229). Although casuistry
is a commonly used linguistic and discursive practice, scholars have yet to develop a
clear typology of casuistic practices (Jasinski, 2001: 90). To amend this shortcoming,
I conducted a study of casuistic practices used by China’s leaders to justify the shift
from a planned to a market economy. I identify four types of casuistry: dissociation,
association, substitution, and stretching.
This study contributes to management and organization studies by outlining
the ways in which rhetorical casuistry enables the shift between conflicting
institutional logics. Many strategic changes in organizations are constrained by
established institutional logics. Change agents faced with these constraints, yet
hoping to initiate change, may choose to justify the change as a continuation or a
violation of established institutional logics. When outsiders initiate radical change
they often choose to dismantle established institutional logics in favor of new
practices and social arrangements. In contrast, leaders or organizational incumbents
often choose the continuation and extension of established institutional logics.
Leaders prefer to maintain established institutional logics in order to bring about
radical change and new practices while preserving those social arrangements that

41

protect their positional power. Although institutional scholars have studied outsider
driven radical change, they have failed to explain adequately elite-led or insider
driven radical change.
To rectify this problem, this paper shows how elites use casuistry to shift
between radically different and conflicting institutional logics without admitting so.
In a sense, elites bring about radical changes in institutional practices and logics
while preserving established principles. This paper first outlines the theoretical
background, followed by a section on data and method. The body of this essay
contains rhetorical analysis of key concepts, catch words and phrases that Chinese
leaders coined to represent the characteristics of China’s market-based reform, the
relationship between the state and the market, and the nature of public and private
companies. My analysis shows how Chinese communist leaders use casuistry to
stretch the concept of communism such that it is no longer inconsistent with free-
market principles and practices. This allows communist leaders to adopt these
principles without losing their legitimacy or power. Finally, this essay discusses the
contribution of casuistry to the study of strategic change and institutionalization.

THEORETICAL BACKGROUND
Neoinstitutional scholars propose that institutions are conditions for diffusion
(Strang & Meyer, 1994, Greenwood, Suddaby, & Hinings, 2002). While diffusion is
conceptualized as the increase of density or prevalence of organizational practices,
arrangements, and forms, the concept of institutions is not well-defined (Jepperson,

42

1991). This dissertation adopts the view that institutions are both material and
symbolic (Friedland & Alford, 1991), and that the diffusion of the material practices
coupled with the increased level of cognitive taken-for-grantedness indicates
institutionalization (Green, 2004). The goal of this essay is not to assess the degree
of institutionalization of the market in China’s economic system – such assessment is
beyond the scope of this essay. Rather, this essay aims to unravel the cognitive or
symbolic mechanisms of institutionalization by examining the rhetorical moves in
the justifications for the adoption of controversial practices in the name of orthodox
beliefs and values.
There are two kinds of institutional change. The first kind of institutional
change is built on the complete overthrow of the established ideology or value
system. The second kind of institutional change is justified on the basis of the
established ideology or value system. For various reasons, institutional entrepreneurs
may choose to justify change on the basis of established ideology or a given value
system. A conjecture of this essay is that the second kind of institutional change
requires different rhetorical strategies than the first kind. This section specifies the
conditions that call for the second type of institutional change, introduces casuistry
as a theoretical construct for explaining rhetorical strategies in this type of
institutional change, and examines rhetorical literature for tools that can be used to
explain specific casuistic process.

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Institutional Change in the Context of Contradictory Institutional Logics
Neoinstitutional scholars have introduced the concept of institutional logics,
theorization, and rhetoric into the study of institutional change (Friedland & Alfrod,
1991; Strang & Meyer, 1994; Green, 2004). Logic is defined as “a science that deals
with the principles and criteria of validity of inference and demonstration: the
science of the formal principles of reasoning” (Merriam-Webster, 1998: 685).
Drawing from this definition, institutional logics are the abstract principles and
criteria for assessing the validity of particular theorization activities. Theorization is
defined as “the abstraction of categories and the specification of relations such as the
relationship between means and ends” (Strang & Meyer, 1994). Theorization refers
to the activities of categorization and reasoning. Within this scheme, rhetoric is the
use of language to make what is theorized persuasive.
The persuasiveness of rhetoric resides in the character of the speaker, in a
certain disposition of the audience, and in the speech itself (Aristotle, 1991: 74). This
essay focuses on the speech – that is, how much rhetoric enhances the validity of
theorized categories or propositions based on commonly accepted principles and
criteria in a particular field of activity.
When institutional change takes place in the context where the new
institutional logic completely replaces the old logic as the new principle and criteria
for assessing the validity of theorization, the persuasiveness of the rhetoric that
conveys the theorization is assessed on the basis of the new institutional logic.
However, when institutional change takes place in the context where multiple and

44

contradictory institutional logics are equally powerful, assessment of the validity of
theorization is in question. In the case of China’s market reform, the logic of market
and the logic of plan both provide principles and criteria for theorizations. Within
such a context, what is considered persuasive becomes a delicate negotiation
between multiple institutional logics.

Casuistry and Institutional Change
This essay contends that when institutional change takes place in the context
of contradictory institutional logics, the rhetoric that is used in theorization is
casuistic. Casuistry as a rhetorical technique gained a pejorative reputation in the
eighteenth century; it was perceived as a degenerate form of reasoning that entails
moral laxity and an intention to mislead. Rhetorical scholars Toulmin and Jonsen
rescued casuistry from its historical denigration and proposed to see it as a useful
case-based method of decision-making for solving moral dilemmas. They argue that
casuistry lies at the heart of rhetorical reasoning (Jonsen & Toulmin, 1988). Kenneth
Burke regarded casuistry as a necessary and inescapable attribute of language
(Burke, 1969 [1950]). He defines “casuistic stretching” as a rhetorical method
wherein “one introduces new principles while theoretically remaining faithful to old
principles” (Burke, 1984 [1937]: 229). Burke contends that “all ‘metaphorical
extension’ is an aspect of casuistic stretching” and that “language owes its very
existence to casuistry” (Burke, 1984 [1937]: 230).

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In the context of contradictory institutional logics,casuistry functions to
reconcile contradictions by using ironic strategies to mediate between terms
(Carlson, 1992). “Irony arises when one tries, by the interaction of terms upon one
another, to produce a development which uses all the terms (Burke, 1969 [1945]:
512).” Casuistry captures the ways by which institutional entrepreneurs develop new
principles without jeopardizing the legitimacy of old principles.
However, except for Jonsen and Toulmin (1988), scholars have not examined
various forms of casuistry. Jonsen and Toulmin’s study of casuistry is primarily
based on ethical case analysis and deals with moral arguments. The interest of this
study is to outline ways of casuistic stretching as a strategy that facilitate institutional
change.

Forms of Casuistry
This essay answers Burke’s call for a methodological examination of
casuistry. Burke (1984 [1937]: 232) states that, “The process of casuistic stretching
must itself be subjected continuously to conscious attention. Its own
resources…must be transcended by the explicit conversion of a method into a
methodology. The difference between casuistry as a method and casuistry as a
methodology is the difference between mystification and clarification, between the
concealing of a strategy and the description of a strategy (criticism as explanation).”
For Burke, casuistry was a mystery unless the ways in which casuistry works is

46

consciously scrutinized. The promise is that if people are methodologically
conscious of the casuistry at work, then they can use it instead of being used by it.
Following Burke’s call, this essay intends to examine forms of casuistry. My
analysis draws from theories in argumentation, including the idea of association and
dissociation in Perelman and Olbrechts-Tyteca’s (1969) typology of argumentation
schemes, figures of speech such as metonymy as a form of substitution, and theory
of concept stretching in political science. The four types of casuistry are: (1)
dissociation; (2) association; (3) substitution; and (4) stretching.

METHOD
Data
These four types of casuistry are arrived at through close reading of a
selective body of text. The primary source of documents consists of reports delivered
at Party Congresses from 1978 to 2007, including national congresses and plenum
sessions held by the Central Committee of the Party in between the national
congresses. There are six national congresses during this time period, starting from
the Twelfth National Congress of the CPC in 1982, and ending with the Seventeenth
National Congress of the CPC in 2007. In addition to national congresses, plenum
sessions have also resulted in important, era-breaking reports. The Third Plenum of
the Eleventh Party Congress in 1978 is an example; it marked the start of China’s
reform.

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The reason for choosing this body of text is because the Party Reports contain
the most important concepts and slogans, and they represent the most careful and
strategic use of rhetoric by the Party. Many new slogans and phrases diffused widely
within the populace at one time or another during the reform. Once they appear in
Party Reports, they become official language. Media outlets that are Party organs
would then invest a lot of attention and resource in propagating these slogans and
phrases. People would adopt quickly these official rhetorics in their daily
conversations. These new slogans and phrases subtly shape how Chinese make sense
of reality. Scholars noted that the Party designs its rhetoric so as to make the
maximum influence over the populace (Kluver, 1996). No doubt the Party creates
these texts with the highest level of attention and ability. Therefore, tracing the
rhetorical moves in these texts is important for explaining how radical change takes
place without breaking up completely with established principles.

Data Analysis
The unit of analysis lies primarily at the level of concepts and slogans.
Scholars of Chinese rhetoric point out that all Chinese leaders have used slogans as a
rhetorical tool to push social change (Lu & Simons, 2006). The use of slogans have
their roots in the Confucian concept of zheng ming (rectification of names).
According to this idea, the rectification of a new name (e.g., slogans, catch words,
set phrases) initiated by the ruler is the foundation for making new arguments and
implementing new practices. Lu and Simons (2006: 267) note that the use of slogans

48

allow the political leaders to suggest a lot in a very few words, to allow multiple
interpretations by heterogeneous audiences, and to include “code words” that convey
hidden political agendas while appearing to conform to the official ideology. The
four types of casuistry this research identified are all operative at the level of
concepts and slogans.

THE ROAD FROM PLAN TO MARKET
Plan and Market as Organizational Forms
Many scholars have noted that China’s system is replete with hybrid forms,
mixed economies, and “half-way” institutions (Hassard, Morris, & Sheehan, 2002;
Nee, 1992). While some view these hybrid forms as indications of China’s
incomplete institutional arrangements, others view them as new and emergent
institutional forms with distinct characteristics. Scholars agree that the hybrid forms
are defined by the conflicting institutional logic of plan and market (Nee, 1992;
Steinfeld, 2007). In this section, I describe plan and market as two distinctive ideal
types of organizations.
Whereas many western countries have socialist components, i.e., parties that
have origins in the communist era, and state-owned enterprises in the economic
sectors, the socialist planned economy typically refers to the Soviet model of
economic development. In this model, the state owns all the means of production,
and directs the centrally planned economy. As the most central and powerful actor in
the economy, the central planners assume the role of allocating and distributing

49

resources, setting production quantities for enterprises, and determining prices for
goods. Ideally, the central state guides all the production and exchange in the
economy through comprehensive calculation of values of labor and goods, and
efficient coordination and administration of economic activities at the national level.
Practically however, countries differ in terms of the scale and scope of central
planning. The former Soviet Union had a far more efficient and comprehensive
centrally planned economy than China. For example, just before the start of their
economic reforms, China’s state sector accounted for only 24 percent of total
employment and 78 percent of urban employment in 1978, compared to the former
Soviet Union whose state sector accounted for 88 percent of total employment and
96 percent of urban employment in 1988(IMF, 1991; SSB, 1990). The former Soviet
Union also had a far more elaborated system of national planning thanks to its more
developed and sophisticated bureaucratic system. Only 791 goods were under
national planning in China in 1979, compared to 1.2 million goods in the Soviet
economic planning in the late 1970s (Qian & Xu, 1993).
State-owned enterprises are the principle economic entities in a socialist
planned economy. Although capitalist countries have state-owned enterprises
(SOEs), socialist countries are distinctive in that their SOEs are the dominant actor in
the economy in terms of both size and power. SOEs account for 10 percent of the
value added in the Western industrialized democracies (the member countries of the
Organization for Economic Cooperation and Development (OECD), roughly 15 to
20 percent in developing countries; but in socialist counties, they account for 85

50

percent on average (Savas, 1992). SOEs are the embodiment of the plan at the firm
level.
The difference between plan and market echoes an established tradition of
scholarship in organizational theory, which regards hierarchy and market as an ideal-
typical organizational form (Adler, 2001). A plan is similar to a form of hierarchy.
Hierarchy uses the mechanism of authority to achieve efficiency. The market form
relies on competition to optimize production and allocation. Organizational theorists
have proposed a third type of organizational form, clan or community (Ouchi, 1980;
Adler, 2001). In Adler’s typology, hierarchy, market, and community are three
dimensions from which a society takes its shape. A society that is high on hierarchy,
low on market, and low on community is characterized as “state socialism.” A
society that is low on hierarchy, high on market, and low on community is
characterized as “competitive capitalism.” The pre-reform China was classified as
state socialism by Western scholars (Nee, 1992). However, scholars exhibit little
consensus about what China is becoming in its transition away from state socialism.
How does state hierarchy and market competition relate to one another? What is the
level of trust? This dissertation posits that actors’ own words about their situation are
a vantage point from which to begin defining a new, emergent organizational form.

Transition from Plan to Market
The literature on transition economies outlines two types of transition: the
incrementalist model and the shock therapy model. Political scientists have produced

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a large body of literature on practices defined by these two models, The shock
therapy and incremental models differ along four attitudes toward economy: (1)
uncertainty, (2) complementarities, (3) focus of reforms, and (4) the reform of state-
owned enterprises (Lai, 2006). First, shock therapy advocates believe that they
possess full knowledge of neoclassical economics and of market engineering, and
therefore know how to build a market economy from scratch. Incremental scholars,
on the other hand, admit the unknown and uncertain nature of the reform and
propose to learn about reforms by regarding reforms as self-conducted experiments
(Murrell, 1991; Stiglitz, 1999; Lai, 2006: 3).
Second, shock therapists view reform measures as a systemic whole and
therefore insist that the reform should be comprehensive (Ickes 1990; Lipton &
Sachs 1990). Incremental scholars propose that a few reform measures which target
specific sectors and regions may work more efficiently (Chen, Jefferson, and Singh,
1992; Pomfret 1997; McMillan & Naughton 1993; Stiglitz 1999; Qian 2003).
Third, shock therapy advocates believe that market will develop
spontaneously once these reform measures are all in place (Lipton & Sachs 1990;
Wolf 1991), whereas incrementalists suggest that three aspects of the transition
should constitute the focus of effort. These aspects consist of an improved incentive
structure, liberalized entry and competition at the markets, and the development of
institutions necessary for a market economy (Gelb, Jefferson, & Singh 1993;
McMillan & Naughton 1993; Qian, 2003).

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Fourth, shock therapy scholars propose that inefficient SOEs should be
closed down immediately, while incrementalists maintain that SOEs can be
restructured for improving performance (McMillan & Naughton 1993; Naughton,
1996; Stiglitz, 1999).
In addition, the two schools have divergent views on the role of the state in
reforms. Shock therapists hold a negative view of the state’s role in economic
reforms, seeing the bureaucratic planning by the state as largely interventionist and
instinctively conservative (Lipton & Sachs, 1990). Incrementalists see a positive and
important role played by the state in guarding the markets through setting and
enforcing law and norms and through securing property rights (Murrell, 1991;
Stiglitz, 1999; World Bank 1997a, 2002; Roland, 2000). Incrementalists believe that
a weakened state can lead to asset stripping, unrestrained grabbing hands, and
economic and political anarchy (Stiglitz, 1999).
China has successfully managed its economic transition thus far compared to
other transition economies. Economies that were treated to the shock therapy model
all suffered a steep decline in economic output for years after their reforms. By
contrast, China’s economy has grown steadily at a phenomenal rate. Big bang
scholars largely attribute China’s success to favorable economic conditions before
reforms and amicable political conditions during reforms. In contrast, incrementalists
and mainstream China scholars argue that gradualist strategies and successful
institutional arrangements are the key to China’s success. They maintain that these
evolutionary steps helped alleviate the sudden drop in economic outputs. China’s

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transition demonstrates the plausibility of an incremental yet persistent reform
agenda.
Although the incremental model offers some explanation as to why China’s
transition is more successful, it ignores a critical aspect of the actual transition
process: how actors have justified and legitimated the transition. As other communist
countries began to abandon communism, the Chinese leadership faced difficult
decisions. The Chinese leadership could have chosen not to engage in any reform, to
engage in partial reform, or to completely change the color of the country. The
Chinese leadership made a strategic choice to “reform and open up,” and it also
deliberately chose not to emulate the Russian model. This strategic choice put China
in a position where there was no roadmap to follow. In a world hostile to communist
ideology and with strained relationships with the former Soviet Union, the Chinese
leadership had to innovate. An important element of the innovation was to find
appropriate ways to unlock old assumptions and free up new premises that both
facilitate reform and prevent chaos.

Transition from the Logic of Central Planning to the Logic of Market
A socialist planned economy and a capitalist market economy differ in
ownership, organizational forms, and management practices. However, ideologies
underlie these observable differences. Communist countries embrace Marxist
ideology which denounces private ownership, exploitation, and espouses equality
and emancipation. Capitalism has had a much longer existence than communism: its

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religious, political, and philosophical roots connect back to the origins of modern
Western civilization. As a result, practices and structures in both communist and
capitalist countries are infused with values and beliefs far beyond their technical and
formal properties. The process by which practices and structures acquire symbolic
meanings is considered institutionalization (Selznick, 1949). The transition from
communism to capitalism, therefore, involves far more than a change of
organizational practices and arrangements. It involves power struggles and political
strategies, changing the logic and reasoning of thousands of managers of an
economy. These symbolic maneuvers depend on actors’ use of rhetoric to articulate
and theorize change.
Studies on the political and structural changes involved in China’s transition
abound, but few studies have focused on the change of outlook. Evidence suggests
that change of views in transition economies is not easy. In the case of China, the
transition from central planning to a market economy has undergone more than thirty
years of development, replete with nation-wide, intensive debates and controversies.
In the case of some other former communist countries, the transition was
accompanied by military coup, execution of leaders, overthrow of government, and
complete abandonment of communism.
Neoinstitutional theory explains why it is so difficult to change orientations.
From the phenomenological and cognitive perspective, change is difficult because
actors take for granted established understandings, and therefore do not see
alternative possibilities (Zucker, 1977). In an experiment, Zucker (1977) shows that

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actors who are embedded in the logic of authority are much slower in changing their
view from what the authority told them to what they actually see, compared to actors
who are not in an authority relationship. Institutional rhetoricians see institutions as
premises that are accepted as truth with little need of justification (Green, 2004).
Since these premises are taken as truth, they are seldom challenged, and remain
stable. Communist ideology leads people to believe that capitalism is wrong, bad,
and inefficient. Practices that characterize capitalism are therefore wrapped in these
premises. It is impossible to legitimize capitalist practices without unpacking the
assumptions behind these premises first.
The shock therapy and the incrementalist models represent different ways of
unlocking taken-for-granted communist premises. The shock therapy model
denounces communist beliefs as false, and therefore discontinues all communist
practices and replace them with capitalist ones. In contrast, the incrementalist model
proclaims adherence to communist premises, yet it introduces many practices that
are quintessentially capitalist. The shock therapy model enjoys logical consistency as
the model proposes complete abandonment of communism and the introduction of
capitalism. The incrementalist model is characterized by inconsistency: it is a big
stretch to justify the introduction of a market in the name of communist principles.
Scholars point out that in China, “the rhetoric of reform has been persistently
and perilously dilemma-laden” (Lu & Simons, 2006). Leaders are constrained by the
here-and-now situations that place specific requirements on what they say and do;
they face specific problems; and there are limited numbers of strategies that they

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may use to accomplish these requirements (Simons, 1970). The rhetoric that the
Chinese leadership employed to justify the reform is largely a response to these
dilemmas.
Coming out of the Cultural Revolution, Chinese leadership faced dilemmas at
several levels. Externally, China as a nation-state faced the problem of defining its
position in the world system. China as a communist country faced the task of
delineating its role in the worldwide Communist movement, since China had often
disagreed with the former Soviet Union on who was more faithful to Marxism. China
as a political entity faced the pressure from both the former Soviet Union and the
United States. In addition, China as an economic entity faced the daunting task of
moving out of poverty. Internally, the Communist Party of China confronted the
burden to reestablish its legitimacy in the aftermath of the Cultural Revolution
initiated by Mao Zedong. Mao’s focus on class struggle led the country into chaos
and economic stagnation. However Mao Zedong represented the very source of
legitimacy for the Party. Another dilemma came from within the Communist Party of
China; significant divisions existed between reformers and conservatives, and it was
unclear which faction would win.
In a context full of conflicts and contradictions, the rhetoric of the Chinese
leadership bends Marxist ideology to the need for reform (Lu & Simons, 2006); it
requires skillful and artful maneuver of theories to provide the ground for reform. To
carry out the economic reform which inevitably introduced the logic of the market
into a country dominated by socialist ideology, the political leaders had to offer

57

cultural frames which would help people make sense of apparent institutional
contradictions. These cultural frames needed to reconcile the tensions and
differences in the institutional field and offer integrated justifications for the reform.
Rhetoric is important in this regard, for rhetoric is essential to the reconciliation of
contradictions. As Burke (Burke, 1969 [1950]) notes, rhetoric stands at the
boundaries of contradictions, serving to provide unity for things that are divided and
consubstantiality when things are different. Examining the rhetoric that the state
employs in legitimating the reform is important for understanding the transition from
plan to market.

ANALYSIS OF CASUISTRY
This section discusses four types of casuistry that the Communist Party of
China employed between 1978 and 2008: dissociation, association, substitution, and
stretching. These four types of casuistry share a common denominator: the original
idea is somehow changed to include new elements, yet the new idea still manages to
claim fidelity to the original idea in important ways. The original concept and its
initial meaning get carried through in the new language and serves important
justificatory functions.

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Dissociation
Practice is the sole criterion for measuring truth
Before Mao Zedong died in 1976, he appointed Hua Guofeng to be his heir.
As the legitimate successor, Hua Guofeng assumed leadership. Hua Guofeng
advocated a slogan, referred to as the “Two Whatevers”, it reads: “whatever comrade
Mao Zedong has endorsed cannot be changed; whatever comrade Mao Zedong has
done cannot be changed.” This slogan is Hua’s way to secure the legitimacy of his
own position as the rightful successor of Mao. The problem of this slogan, however,
is that this slogan prevents any action that attempts to rectify the numerous mistakes
and misrules that the Cultural Revolution created. Based on this slogan, because Mao
Zedong endorsed the Cultural Revolution, the Cultural Revolution was right; because
Mao Zedong discharged Deng Xiaoping from office, Deng Xiaoping should never
come back to politics; because Mao Zedong appointed Hua Guofeng to be the heir,
Hua Guofeng was the most rightful leader.
Deng Xiaoping is one of the top Party leaders whose relationship to Mao
goes far back to the revolutionary years. He was loyal to Mao in politics, but he often
disagreed with Mao on economic issues. His political life rose and fell several times.
The last time Deng was discharged from his government positions, he was labeled as
the “biggest Capitalist roader inside the Party.” Although Mao Zedong’s criticism of
Deng Xiaoping was harsh, he did not expel him from the Party. Upon Mao’s death,
Hua Guofeng assumed the top position in the Party and the country; together with
some Party elders he prosecuted the “Gang of Four.” At the third Plenum of the

59

Tenth Central Committee of the CPC in 1977, the Party decided to resume Deng
Xiaoping’s positions. Although reluctant, Hua had to accept Deng back in politics.
Deng uttered his disagreement with Hua Guofeng’s “Two Whatevers” in
many occasions. In the speech he gave at the third Plenum of the Tenth Central
Committee of the CPC, entitled Understanding Mao Zedong Thought in Its Integrity
and with Accuracy, he emphasized Mao Zedong Thought as a system of ideas in
need of accurate understanding. Furthermore, he cautioned against distorting Mao
Zedong Thought by taking Mao Zedong Thought out of context. In a private
conversation with Party elders, he said, “It is not right to take what comrade Mao
Zedong said in one condition to apply to another condition. ... It is not possible that
one’s every word is correct, that one is absolutely right. … Mao Zedong himself did
not say ‘whatever’(Yang, 1998: 116).”
The tension between Hua Guofeng’s slogan and Deng Xiaoping’s criticism
burst into a nation-wide debate with an article published in 1978 entitled Practice is
the sole criterion for measuring truth. This article triggered a theoretical debate on
how to know truth and what criteria are appropriate for measuring truth. Underlying
this theoretical debate was a political struggle between Mao’s legitimate successor
Hua Guofeng and the more reform-minded leader Deng Xiaoping. Deng Xiaoping
openly supported the “practice” camp in public addresses, emphasizing that Marx,
Lenin, and Mao all share the idea of the primacy of practice and the importance of
practice to theory.

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Deng Xiaoping’s rhetoric is a form of dissociation. Dissociation renounces an
opinion initially accepted by the audience by introducing a division into a concept
the audience previously considered as united (van Eemeren, Grootendorst, &
Henkemans, 1996: 117). The “Two Whatevers” slogan presents arguments based on
the assumption that Mao Zedong’s words are the ultimate truth and incontestable. At
that time, it was too risky politically and ideologically to refute directly this
assumption and claim instead that Mao Zedongdoes not represent truth. Such a claim
would agitate the audience, of which many were Mao’s stalwarts. As argumentation
scholars point out, “the crucial thing is that the newly introduced dissociation should
be acceptable to the audience that the speaker wishes to reach (van Eemeren,
Grootendorst, & Henkemans, 1996: 118).” By focusing the question on the criteria
for measuring truth, Deng introduced a subtle division between Mao and truth. This
division has significant ramifications. The new emphasis on practice as the sole
criterion for measuring truth was a powerful message that replaced the assertion
which equated Mao with truth. First, Deng pointed out that a central element of Mao
Zedong’s thoughts was to seek truth on the basis of facts. Mao Zedong himself
criticized dogmatism extensively. Mao espoused the idea that one should do field
research in order to determine what was going on. Second, Deng reminded his
audience that Mao openly acknowledged that was not always right. Deng
emphasized the importance to understand Mao Zedong’s words from a holistic
perspective and to interpret Mao’s specific arguments within their original contexts
in order to avoid distortion. The very point that Mao Zedong’s words could be

61

distorted is a bold step toward dissociating Mao from truth. It was a liberating
argument at that time, especially considering that people had to cite Mao Zedong’s
words before any daily activity during the height of the Cultural Revolution.
Deng and reform-minded leaders used the casuistic practice of dissociation to
separate Mao from truth while upholding Mao’s own arguments. The refutation of
the “Two Whatevers” slogan and the establishment of the new slogan – that is,
“practice is the sole criterion for measuring truth,” set up the tone for further
dissociating China’s future from the policies set up by Mao and the Cultural
Revolution.

Mao Zedong Thought is not Mao Zedong’s thought
In China’s official political discourse, “Mao Zedong Thought” is one of three
theoretical sources of the Communist Party of China, along with Marxism and
Leninism. As the Cultural Revolution ended with Mao’s death and the prosecution of
the “Gang of Four,” the Communist Party of China faced the requirement of
proffering an official discourse on how the Party sees the position of Mao. There are
several alternatives. A model is how the Soviet Communist Party treated Stalin after
he died. In 1956, three years after Stalin’s death, Nikita Khrushchev denounced
Stalin for his transgressions in a “secret report” to the Communist Party’s Twentieth
Congress. Stalin’s status was completely overturned. Another standpoint the CPC
could take is to avoid talking about Mao’s role in the Cultural Revolution and
continue to enshrine Mao as the flawless founder and savior of communist China.

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Mao Zedong Thought was elevated officially as the guiding theory of the
Communist Party of China at the Seventh National Congress of the CPC in 1945. It
was taken out from the Party Constitution at the Eighth National Party Congress in
1956, following the wave of thought that advocated liberation of thoughts and
objection to idolization. In 1969, three years into the Cultural Revolution, Mao
Zedong Thought was once again written into the Party Constitution as the guiding
thought of the Party at the Ninth National Congress of the CPC.
The Communist Party of China faced a dilemma: Mao Zedong was a major
source of legitimacy for the Party, yet Mao’s initiation of the Cultural Revolution
was disastrous. If the Party completely turned Mao upside down, the Party would
have to face the problem of justifying its own legitimacy. On the contrary, if the
Party was completely blind to Mao’s mistakes, it would have to deal with dissent
from the People. In this context, the CPC passed a Resolution on some historical
issues about the CPC after the founding of the PRC in 1981. The Resolution
articulates how the Party sees Mao Zedong. It says that although Mao Zedong made
significant mistakes later in his life, his contribution is foremost and his mistake is
secondary.
Based on the Resolution, Mao Zedong was no longer the perfect figure
embodying legitimacy for the Communist Party of China. But the Party did not
abandon the phrase “Mao Zedong Thought.” Instead, the Resolution dissociates the
concept “Mao Zedong Thought” from its taken for granted meaning. When the
concept Mao Zedong Thought was first mentioned by Party theorist Liu Jiaxiang in

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1943 and then by top Party official Liu Shaoqi in 1945, it indicated the thoughts of
Mao Zedong himself. In contrast, the Resolution defines Mao Zedong Thought as the
collective thoughts of members of the Communist Party of China. It specifies that
not all Mao Zedong’s individual thoughts are Mao Zedong Thought, clarifying
further that most of Mao Zedong’s thoughts later in his life are in fact not Mao
Zedong Thought. This definition of Mao Zedong Thought becomes the official
discourse of the Party. Below is a paragraph in the Party Constitution passed at the
Seventeenth National Congress of the CPC in 2007:

The Chinese Communists, with Comrade Mao Zedong as their chief
representative, created Mao Zedong Thought by integrating the basic tenets
of Marxism-Leninism with the concrete practice of the Chinese revolution.
Mao Zedong Thought is Marxism-Leninism applied and developed in
China; it consists of a body of theoretical principles concerning the revolution
and construction in China and a summary of experience therein, both of
which have been proved correct by practice; and it represents the crystallized,
collective wisdom of the Communist Party of China.

This dissociation of Mao Zedong Thought from Mao Zedong’s individual
thoughts is a rhetorical innovation. “Dissociation consists in letting existing wholes
disintegrate and separating elements previously regarded as a unit (Perelman &
Olbrechts-Tyteca, 1969; van Eemeren, Grootendorst, & Henkemans, 1996: 106).”
Based on argumentation theory, “The process of dissociation entails the introduction
of a division into a concept that audience previously regarded as constituting a single
entity (van Eemeren, Grootendorst, & Henkemans, 1996: 117).”

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The Party’s rhetorical dissociation serves the arguer’s purposes in two ways.
First, dissociation changes the original meaning of the concept and introduces a
differentiation within the original concept. The Party used this differentiation to
create some degree of consistency of its orientation: the Party denounced the
Cultural Revolution initiated by Mao, therefore the Party should no longer consider
Mao’s thoughts as the guiding thought of the Party. Second, dissociation allows the
Party to keep Mao Zedong in its Constitution. The name Mao Zedong serves
important symbolic functions as Mao Zedong is undeniably the most central figure
of the Party, and the removal of the name would have generated doubts about
changes in Party orientations. Dissociation serves to justify the legitimacy of the
Party. Since the Party still regards Mao’s contribution as primary, it is inappropriate
to remove Mao completely from the Constitution. But the Party also sees Mao as
someone who made mistakes based on wrong thoughts, so it is inappropriate to
enshrine every thought that Mao expressed. The casuistic practice of dissociation
allows the Party to maintain Mao Zedong Thought as the guiding principle of the
Party, yet to change significantly what Mao Zedong Thought includes and excludes.

Association
Socialism with Chinese Characteristics
Deng Xiaoping and other reformers employed dissociation to separate truth
and the guiding principles of the Party from Mao Zedong. These dissociations are

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important because Mao Zedong’s dogma was an ideological hurdle for China to
change policy directions.
Dissociation of established slogans is not sufficient for moving the reform
forward. Deng as the paramount leader “was rhetorically required to provide a new
slogan that would indicate a departure from the Maoist idealist/utopian path, and yet
still legitimize the Party’s rule” (Lu & Simons, 2006: 270-271). The new slogan is
“Socialism with Chinese Characteristics.” It first appeared in a speech given by Deng
in 1983. In 1987, the slogan appeared in the Party Report of the Thirteenth National
Congress of the CPC, titled Marching on the road of socialism with Chinese
characteristics, delivered by Zhao Ziyang, the General Secretary of the Party. Over
the years, “Socialism with Chinese Characteristics” has appeared in all Party Reports
of National Congresses, including the Fourteenth, Fifteenth, Sixteenth, and
Seventeenth National Congresses of the CPC in 1992, 1997, 2002, and 2007,
respectively. Using the same slogan in five consecutive Party Reports over the span
of twenty years is unprecedented in the history of the Party; it testifies the centrality
of this slogan to the new orientation of the Party. .
This slogan combines two concepts that belong to two different categories:
socialism belongs to the category of social systems, and China belongs to the
category of country’s names. “Association consists in unifying elements into a single
whole by bringing together elements which were previously regarded as separate
(van Eemeren, Grootendorst, & Henkemans, 1996: 106).” Before the coinage of this
slogan, the word socialism was most commonly used to describe the nature of China,

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but the word China was never used to modify socialism. This combination of
socialism and China undeniably creates a novel sense of existence. First, it suggests
that China is different from socialism, because otherwise there would be no need to
bring China into the slogan. Juxtaposing China with socialism brings out
immediately many connotations of the word China: China’s experience with
imperialism, colonialism, its current backward economy, and its glorious imperial
past. Combining China and socialism in fact triggers all the properties and memories
of China that are not socialist. Second, it indicates that socialism is not unitary, but
consists of many variations. Deng pointed out that China encountered many
problems because it mimicked the Soviet model of socialism. He believed that
neither the Stalin model nor the Mao model was successful, and that China should
break away from the Soviet model and denounce the Cultural Revolution (Deng,
1993: 261).
The five Party Reports interpret carefully this slogan as the central theory of
Deng Xiaoping and the guiding mantra of the Party. These interpretations introduce
several new elements into the slogan. First, a theoretical innovation predicated on
this slogan is the theory on the “Primary Stage of Socialism.” The report of the
Thirteenth National Congress of the CPC in 1987 claimed, “To understand correctly
the historical stage that our society is currently in is the primary issue for building
socialism with Chinese characteristics, and is the fundamental basis for us to plan
and implement correct orientation and policies.” The correct understanding of
China’s current historical stage is what the Party named the “Primary Stage of

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Socialism.” According to the 1987 Party Report, “Building socialism in a backward
oriental country like China is a new project in the development of Marxism. The
conditions we face are not the socialism that is built on highly advanced capitalism
that the founders of Marxism envisioned, nor are they the same with other socialist
countries.” The Report went on to say that China made mistakes and suffered severe
consequences since late 1950s because of policies made under the influence of the
leftist tendency. The Report reasoned that these mistakes were due to an incorrect
understanding of the historical stage that China found itself in. The 1987 Party
Report defined this historical stage:
It is not a generalized concept that points to the initial stage that any country
entering socialism will undergo. It is a specific concept that points to the
special stage that our country has to undergo as we build socialism under the
conditions of backward production force and undeveloped commodity
economy. It will take at least a hundred years for our country to go from
completing the socialist reform of the private ownership of production
materials in the 1950s to accomplishing socialist modernization, this all
belong to the primary stage of socialism. This stage is different from the
transitioning period when the economic foundation of socialism is still not
built; it is also different from the stage where socialist modernization has
been realized. The principle contradiction facing our stage is the
contradiction between people’s growing material and cultural needs and the
backward social production. Class struggle will still exist for a long time at
some degree, but it is no longer the principle contradiction. In order to solve
the contradiction of the current stage, we must greatly develop commodity
economy, increase the efficiency of labor production, gradually accomplish
the modernization of industry, agriculture, national defense and science and
technology, and we must reform the part of production relations and super-
structure that do not fit the development of the production force.

As Kluver (1996: 72) notes, the Party introduces the theoretical innovation of the
“primary stage of socialism” in order to reformulate ideological orthodoxy while
simultaneously maintaining the vision of the national myth – achieving socialist

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modernization. The insertion of a well-theorized historical stage into China’s
socialist program provides the basis for the association between socialism and China
in Deng’s slogan. These two concepts were combined into a new unified concept,
indicating and representing a specific historical moment with well-defined principles,
goals, and characteristics.
A second core element of this slogan is an ideological basis for economic
reform. The term “Chinese characteristics” invokes an undeveloped production
force, backward production relations, and an ill-structured economy. Using “Chinese
characteristics” to modify socialism stimulates a sense of urgency for taking greater
steps of reform in order to advance China’s economic system. The 1987 Party Report
emphasized this sense of urgency:
First, we much focus our effort on modernization. The fundamental task of
socialist societies is to advance production force. At the primary stage, in
order to lift ourselves out of poverty and backwardness, it is especially
needed to regard the advancement of production force as the center of
all the work. Whether something is beneficial to advancing the production
force should be the starting point when we think about every problem and the
fundamental criterion to measure all the work.

Second, we must insist on comprehensive reform. Socialism is a society that
marches along reforms. At the primary stage, especially at the current
time, reform becomes an even more urgent need, because the system has
been ossified for a long time and is severely constraining the
advancement of production force.

In sum, the slogan “Socialism with Chinese Characteristics” created a new banner
under which many practices prohibited in the prior era were permitted, such as the
de-collectivization of farms, development of town and village enterprises and private

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enterprises, creation of special economic zones, and even the establishment of a
stock market. Moreover, this slogan allowed China to maintain allegiance to the
socialist ideology.

Substitution: Zebra and Painted Horses
Slogans like “practice is the sole criterion for measuring truth” and
“socialism with Chinese characteristics” created the rhetorical flexibility for China to
move away from the myth of Mao and toward something that resembles a market
economy. However, it took fourteen years for the Party to employ officially the
concept “market economy” in its Party Report. Between 1978, when the economic
reform first started, and 1992, when Jiang Zemin defined China’s economy as a
“socialist market economy,” the Party employed a series of slogans to label and
describe China’s economic system. Each new slogan consists of elements associated
with the logic of plan and elements connected to the logic of the market. Each time
when an old slogan was replaced by a new one, the society seemed to move a step
away from the logic of plan and toward the logic of market.
The phrase “socialist market economy” first appeared in the 1992 Party
report delivered at the Fourteenth National Congress of the CPC by the second
generation of Party representative Jiang Zemin. Jiang claimed that “[T]he objective
of economic reform is …to establish and improve the system of the socialist market
economy.” The 1997, 2002, and 2007 Party Reports all referenced the event of the
Fourteenth Party Congress, regarding Jiang’s official coinage of this phrase as a

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significant and history-defining moment in China’s economic reform. Specifically,
the 1997 Party Report called the establishment of the socialist market economy one
of three far-reaching policies the Fourteenth Party Congress made. The 2002 Party
Report further elaborated on the significance of this slogan:
The Fourteenth National Congress of the CPC established the system of
socialist market economy as the objective of the reform, and consequently,
reform and open up and modernization entered a new stage. To develop
market economy under socialist conditions is a great innovation that is
unprecedented, is a historic contribution that Chinese Communist Party
members made to the development of Marxism, and embodies the great
courage of our Party to insist on theoretical innovation and keeping up with
time. The change from the system of planned economy to the system of
socialist market economy represents a new historic breakthrough of the
reform and open-up, and paves the way for new achievements in our
country’s economic, political and cultural development.

Since its first appearance in 1992, socialist market economy as the overarching
slogan has been firmly ensconced in the official rhetoric of China’s economy system.
But why does it take so long for Chinese leaders to use “market economy” in
the official language? The main hurdle is legitimacy. According to Wu Jinglian, a
renowned economist and intellectual in China, the phrase “market economy” was
brought up as early as 1978 in a conference held by the State Council to discuss
economic reform (Wu, 1992). In that conference, some economists proposed to
describe the economy as “a combination of planned economy and market economy.”
But the proposition was denied. Wu (1992) laid out three concerns. First, many
people considered market economy and capitalism synonyms, just as they saw
planned economy and socialism as synonyms. Hence the phrase market economy

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symbolized an ideological violation. Second, the government was concerned that
endorsing a market economy would mean the domination of the economy by
unregulated forces of the market and the subordination of government’s role in
production. Third, many objected the usage of market economy in official language
on the basis that its reliance on the price mechanism would lead to polarization of the
rich and the poor, a contradiction to socialist principles. These concerns indicated
that “market economy” carried considerate negative connotation during the early
years of economic reform.
How does this ideologically sanctioned phrase make its way into the official
language? Zhang Weiying, an important economist and currently the Dean of
Guanghua Management School at Beijing University, conjured up an allegory that
best captures how the top leadership transformed symbolically China’s economic
system from plan to market. It is a story about zebras and horses.
The story involves a village which uses horses as its primary work animal. In
this allegorical world, horses are creatures that complain unrelentingly and demand
food insatiably, yet provide little labor in return. In contrast, zebras are just the
opposite kind of animals – efficient, tireless, and loyal. After many years of using
horses as the primary work animals, poor results led the village chiefs to realize that
it would be better for the village if horses could somehow be replaced by zebras.
However, this is not a small change. The village heads had been extolling the virtues
of horses and condemning the vices of zebras, and in fact, they had elevated horses
to mark the road to salvation, and zebras the path to perdition. Not only had their

72

legitimacy been staked on the contrast between horses and zebras, the villagers had
also come to accept that horses were right and zebras were wrong, whether through
indoctrination, fear, or just force of habit.
The solution that the village chiefs came up with required delicate work and
patience. Every night under the cover of darkness, a few villagers began painting
black strips on a few of the village horses. Each morning everyone was surprised at
seeing these animals, but were repeatedly assured that these were indeed their own
horses with a few harmless stripes painted on. As nights go by, more and more
horses were painted, but with all the painting going on, everybody was still assured
that these were certainly horses, not zebras.
After people became accustomed to life among these painted horses, the
leaders made another move. Again, under the cover of night, they began replacing a
few painted horses with real zebras. Zebras quickly proved their worth in the field,
and village life clearly improved as a result. But all the while, the leadership
maintained that these zebras were just horses, albeit with artfully applied strips.
Gradually people become accustomed to life with real zebras, and they started to
conclude that these animals might indeed be zebras, and that zebras were not so bad
after all. Only after another long interval, well after all the horses had been replaced,
and well after many seasons of prosperity had passed, did the leaders gather the
citizenry and proclaim officially that this was a village of zebras, that zebras were
good, and that horses were bad.

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The switch from horses to zebras represents crucial aspects of economic
reform in China’s transition from a planned economy to a market-based economy.
The painting of horses into zebras deserves particular attention. As an allegory, this
story resonates with the incremental model’s emphasis on the characteristics of
gradualism and pragmatism (Ash, 1988; Child, 1994; Fan & Nolan, 1994; McMillan
& Naughton, 1992; Naughton, 1995; Pye, 1988; Rawski, 1999). Central to the
process of gradual, incremental, and pragmatic reform is the concept of “painted
horses.” Horses are not replaced directly with zebras, rather, the painted horses
served as a bridge that nurtured the cognitive acceptance that is crucial for
institutional transition. As Zhang Weiying (Zhang, 2000) later noted, the leaders
invoked two reasons to justify the painting of horses. First, historically speaking, at
the start of the reform, there was no real zebras, only horses, therefore, painting
strips on horses to make them look like zebras was the only thing the leaders could
do. Second, even if the leaders got a real zebra, other members in their families may
not have liked them. They may have complained that their horses had been replaced
with zebras. Therefore, the leaders had to start by painting horses, because they had
to reassure people of the nature of these animals, namely, they are horses, not zebras.
Painting horses into zebras is a powerful strategy in purposive institutional
transition. These painted horses represent the transitioning necessary to make the
switch occur smoothly without direct confrontation. Replacing horses directly with
zebras risked engendering strong resistance. Zebras lacked legitimacy in the existing
system for they had been long regarded as evil animals. Painting horses with Zebra-

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like strips, however, can effectively fend off accusations by horse-lovers because the
reformers can always defend themselves by saying that these animals are nothing but
decorated horses. Therefore, painted horses allowed the reformers to introduce
something new and controversial, i.e., the image of zebras, while at the same time
maintaining allegiance to the established doctrine. By insisting that these painted
horses were nothing but horses with some artfully applied strips, reformers evaded
any direct attack as a consequence of having initiated changes in the fundamental
principles that bind the community together, thus avoided confrontation on a moral
basis. Yet in the mean time, the strips painted on horses would subtly and gradually
change the way people viewed zebras. Although these painted horses shocked the
people with their zebra like appearance at first, their continued presence helped them
to develop familiarity with and acceptance of the image of a zebra. In other words,
the painted horses helped to contain any possible objection or offense that real zebras
may have generated, while at the same time creating an artifact that invited
alternative and potentially contradictory explanations. Furthermore, it was assumed
that the painted horses would generate little resistance when they were replaced by
real zebras, since no one could differentiate between them. Another critical moment
in the chain of events is when the replacement of painted horses with real zebras
resulted in noticeable improvements. At this point, pragmatic considerations rise to
equal importance with, if not outweighing, the concern for moral legitimacy, and
even the opponents would find little ground for launching an attack on the basis of
which animals were “right” or “wrong”.

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This story is telling on multiple levels. It demonstrates the delicate situations
that the leaders faced when initiating purposive transition from one institutional logic
to another. Specifically, legitimacy is a formidable barrier, and leaders can only
overcome the problem of people not seeing the zebras as legitimate gradually and
with careful maneuver. The “painting” was intended to shape people’s perceptions
and acceptance of zebras, an embodiment of a new institutional logic.
Several “painted horses” were used to bridge China’s transition from plan to
market. These “painted horses” include such phrases as “planned economy as
primary, and market mediation as auxiliary” in 1982, “planned commodity economy”
in 1984, “the state mediates the market, the market guides the enterprises” in 1987,
and finally, “socialist market economy” in 1992. Each phrase represents a significant
redefinition of the relationship between plan and market, and thus a move away from
plan and toward market. Below is a presentation of these casuistic moves.
At the historic Third Plenum of the Eleventh Central Committee of the CPC
in 1978, the Party declared the change of focus from class struggle to economic
reform, but the reform attempt had not been associated with a slogan. Five years
later, at the Twelfth National Congress of the CPC in 1982, the Report still called
China’s economic system a “planned economy,” although it started to define the
relationship between plan and market:
On the issue of correctly implementing the principle of having the planned
economy as primary, and market mediation as auxiliary:
Our country is planned economy on the basis of public ownership. Planned
production and circulation is the primary body of our country’s economy. In

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the mean time, for the production and circulation of some products, it is
permitted to use market adjustment instead of plan. In other words, based
on the specific condition at different times, the state will designate a certain
scope through central planning, and the price mechanism can spontaneously
play a mediating role. The latter part is supplementary to the planned
production and circulation; it is subordinate, secondary, but also necessary
and beneficial.

In this Party Report, planned economy is clearly the dominant form, and the role of
the market is to adjust and mediate within the boundary delimited by central
planning. The relationship between plan and market is best exemplified in a theory
put forth by Chen Yun, one of the Party elders and an economist. Chen has a famous
theory called the “bird cage economy.” The bird signifies the market. The cage
represents the planned economy. The bird can fly freely but only inside the cage.
While Chen Yun’s idea was popular at the time, Deng Xiaoping was inclined
to a more radical approach. As early as 1980, the State Commission for
Restructuring the Economic System, a think-tank of the premier, described China’s
economy as a “commodity economy” in a document. Using “commodity economy”
acknowledges that many household goods are commodities and thus tradable in
markets with currency. The proposition to label China’s economic system as a
commodity economy was met with many criticisms in the early 1980s. Critics argued
that the name “commodity economy” confused the essential differences between a
socialist economy and capitalist economy, and was a form of capitalist “spiritual
contamination” (Yang, 1998: 324).

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Thanks to the effort of reformers, a Decision on Economic Structure Reform
was passed at the Third Plenum of the Twelfth Central Committee of the CPC in
1984. This document named China’s economic system as a “planned commodity
economy.” Three years later, in the Report of the Thirteenth National Congress of
the CPC in 1987, the phrase “commodity economy” appeared 27 times. The Party
Report defined “socialist economy as a planned commodity economy based on
public ownership” and stated that this view is “a scientific summarization of socialist
economy by our Party, a significant development of Marxism, and the fundamental
theoretical ground for our country’s economic system’s reform.” Specifically, the
Party Report detailed what “planned commodity economy” entailed:
Socialist planned commodity economy should be a system where plan and
market are internally unified. On this issue, several basic ideas should be
clarified: first, the fundamental difference between socialist commodity
economy and capitalist commodity economy is the difference between the
foundation of ownership. … The development of socialist commodity
economy relies on the growth and perfection of market; to utilize market
adjustment is definitely not equal to adopt capitalism. Second, plan must be
built on the basis of commodity exchange and price mechanism. The kind of
direct management that is based on command-plan does not fit the need of
the development of socialist commodity economy. The scope of command-
plan should be reduced through a lot of ways such as signing production
contracts on the basis of exchange rules between the state and enterprises and
between enterprises and enterprises. State’s management of enterprises
should gradually change to predominantly indirect management. Third, the
functions of both plan and market apply to the whole society. In general, the
new economic system should be called a system where “the state mediates
market, market guides enterprises.” The state uses economic, legal and
necessary administrative means to adjust the relationship between supply and
demand in the market, creates an appropriate economic and social
environment so as to guide enterprises to make operational decisions
correctly.

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The 1987 Party Report used the concept of “commodity economy” to change
fundamentally the relative position of plan and market: whereas before “planned
economy” had always been the official name for socialist economy, it was relegated
to an equal or even secondary role to a commodity economy. Now the state changed
its role from the planner to a mediator, and its management method from direct to
indirect, command to guidance. The use of “commodity economy” was a significant
step away from “planned economy” because a commodity economy was associated
explicitly with the price mechanism, supply and demand, and the existence of a
market. Moreover, the Party Report stateed that “market” applies to the “whole
society” rather than a segment of the system. This changed the “bird case economy”
metaphor and portrayed the market as a more basic and ubiquitous process in the
system. Although a significant step toward a market system, the phrase “commodity
economy” was less threatening than “market economy” to the official socialist
ideology because commodity existed in almost all social systems: socialism,
capitalism, mercantilism, as well as feudalism and slave society.
After the adoption of the “commodity economy,” it took another five years
for the Party to formally use the phrase “market economy” in Party Reports.
Economists and reform-minded leaders provided new theorizations for the adoption
of the phrase “market economy.” First, economists such as Wu Jinglian published
many articles arguing that “commodity economy” is indeed the same as “market
economy.” Second, Deng Xiaoping took a firm position in his tour to the south in
1992, arguing that plan and market are both economic means, and therefore

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socialism can use market as long as it achieves socialist ends. Deng Xiaoping further
proposed to use three criteria for evaluating whether to use plan or market. These
criteria are called the “three benefits”: whether it is beneficial to advance a socialist
production force, whether it is beneficial to increase the socialist country’s
comprehensive national power, and whether it is beneficial to improve a people’s
living standards. Deng argued that a practice should be adopted as long as it satisfied
any of these criteria. These theories provided the justification for the phrase “market
economy” to enter formally China’s official language.
Jiang Zemin was credited with coining the phrase “socialist market economy.”
The report delivered by Jiang Zemin at the Fourteenth National Congress of the CPC
in 1992 firmly endorsed the legitimacy of market economy by tracing all significant
theoretical development toward the market that appeared in past Party Reports and
documents. It stated that Deng Xiaoping’s argument was a new and significant
breakthrough, removing fundamentally an ideological constraint of the reform. The
1992 Party Report also cited economic improvements as evidence supporting a
market economy to be the goal for economic reform. Furthermore, the Report
defined the “socialist market economy:”
The socialist market economy that we will build is to let market play a
fundamental role in allocating resources under the macro adjustment of the
socialist state, so that economic activities conform the requirement of the law
of price and fit with the changing relationship between supply and demand;
resources can be allocated to places with better returns through the functions
of the price mechanism and competitive mechanism; enterprises will be given
the pressure and incentive so that survival of the fittest will be achieved; we
should use the advantage of market’s sensitivity to all kinds of economic
signals in order to improve the timely adjustment between production and
demand.

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Here “market economy” is not only discussed explicitly in reference to price
mechanism and supply and demand, but also to better returns, incentive, competition,
survival of the fittest – notions that point to a full-fledged market system.
The phrase “market economy” soon replaced the previous phrase
“commodity economy” as the new overarching slogan. “Commodity economy”
appeared only 7 times in the 1992 Party Report, and never appears again in Party
Reports after 1992. “Market economy” was mentioned 19 times in the 1992 Party
Report, 19 times in the 1997 Party Report, 21 times in the 2002 Party Report, and 13
times in the 2007 Party Report. “Socialist market economy” is clearly a “painted
horse” that is closer to a zebra than a “planned commodity economy.” Starting with
1992, “planned economy” disappeared from the official language, signifying the
ending of the era of plan.
During the fourteen years of transition from “planned economy” to “market
economy,” in official language, the Party employed the casuistic strategy of
substitution to undercut gradually the symbolic power of the plan and strengthen the
symbolic power of the market. Words, phrases, and arguments that mildly deviated
from “planned economy” such as “commodity” were introduced first; those that were
closely related to capitalism such as “market economy” were adopted lastly. Step by
step, the Party transformed the official language into a new system of meaning that
looked rather revolutionary compared to the original language. This transformation
of language was not accomplished overnight. It involved careful orchestration of the
co-evolution of material evidence and symbolic representation. A sudden shift of

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official language, although facilitative to the introduction of market practices, can
disrupt the system, intensify contradiction, and diminish leaders’ legitimacy. Deng
Xiaoping, faced with many Chinese who were inculcated to believe market was
wrong, chose to make his point to the Chinese audience later in the reform. Deng
made the argument that socialism can also have market economy to foreigners as
early as 1979, but he did not voice this to the Chinese audience until many years later
(Yang, 1998: 335).

Stretching
The Party abandoned some core concepts of the logic of plan, such as
“planned economy,” but kept other core concepts, such as the concept of “public
ownership system” ( 公有制). Concepts like these are so central to the socialist nature
of the country that their abandonment would indicate the abandonment of the
Marxist and communist ideology altogether. However, although these concepts
remained in use, they were stretched to accommodate new cases.
Political scientist Sartori develops the notion of “concept stretching” based
on logic, specifically the notion of intension and extension of a concept. “Intension”
indicates the internal content of a term or concept that constitutes its formal
definition; “extension” indicates its range of applicability by naming the particular
objects that it covers (Encyclopædia Britannica, 2009). Sartori (1970) contends that
concepts sit on a ladder of abstraction: more abstract concepts have more limited
intensions and wider range of extensions, and more concrete concepts have more

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internal content and limited range of cases that they apply. According to Sartori,
there is a trade-off between intension and extension of a concept, and when a
concept’s intension is stretched to fit cases that are not originally covered by that
concept, the concept is being stretched.
Stretching a concept to cover new cases is consistent with Burke’s notion of
casuistry. In A Rhetoric of Motives, Burke (1969[1950]: 155) defines casuistry as
“the application of abstract principles to particular conditions.” Contemporary
theorists note that the relationship between principles and cases are not mechanistic,
and further examine how principles are adjusted to cases or negotiated in the
relationship between principle and case (Jasinski, 2001:89). Jonsen and Toulmin
(1988) demonstrate the effectiveness of casuistry in practical argumentation,
specifically in relation to decision-making involving moral dilemmas in the medical
profession.
The Chinese Communist Party regards the concept “public ownership system”
as one of the most central concepts that define the fundamental nature of the Chinese
economy and has retained it in the official language. The concept appeared 5 times in
the 1982 Party Report, 16 times in the 1987 Party Report, 5 times in the 1992 Party
Report, 18 times in the 1997 Party Report, 13 times in the 2002 Party Report, and 4
times in the 2007 Party Report. Chinese communists consider “public ownership
system” and “private ownership system” ( 私有制) as a pair of opposites, serving as
the foundation of a socialist economy and a capitalist economy, respectively.
Consequently, the Chinese communist Party never employs the concept “private

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ownership system” to describe the Chinese economy or privatization to describe
China’s reforms. It acknowledges only the existence of private property and
privately-owned enterprises.
Although the Party has retained the concept, it has applied the casuistic
practice of stretching to the concept “public ownership system” in order to
accommodate new cases. The 1982 Party Report claimed that the concept “public
ownership system” was the fundamental characteristic of China’s socialist economy
and part of the “thought work” that defined the socialist nature. Public ownership
system comprised the “state-operated economy ( 国营经济)” complemented by
“individual economy ( 个体经济).” Specifically, the 1982 Party Report stated:
The public ownership system of production materials is the fundamental
system of our country’s economy, and cannot be undermined in any
circumstances.

Our country implements planned economy on the basis of the public
ownership system.

Thought work determines our moral and civic education and socialist nature.
Its main content is: the world view and scientific theory of the working class
and Marxism, the idea, beliefs and morality of communism, the ownership
thought and the collective thought that fit with the socialist public ownership
system, the notion of rights and responsibility and the notion of organizations
and disciplines that fit with the socialist political system, the Marxist attitudes
toward work and the sacrificial spirit to serving the people, and the socialist
patriotism and internationalism, etc..

Socialist state-operated economy is in the guiding position in the entire
economy of the country and the people. … Because the level of development
of our country’s production force is comparatively low and unbalanced, there
is a need for many economic forms to co-exist for a long time. … In villages
and cities, we should encourage the appropriate development of labors’
individual economy within the scope defined by the state and under the

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administrative management of Industry and Commerce; they are necessary
and beneficial complements to the public ownership system.

The 1987 Party Report continued to call “public ownership system” the basis of
socialist economic system and the mainstay of the economy. However, the Party
Report started to talk about “private-operated economy” as well as other market
practices in the same paragraph in which “public ownership system” appeared. As
mentioned above, the 1987 Party Report introduced the new slogan “commodity
economy,” and included concepts related to market in the official language. The
Report acknowledged the development of “many ownership types:”
The reform that we have conducted includes the development of an economy
with many ownership types for which the public ownership system is the
main body and the existence and development of private-operated economy
are allowed; these are all determined by the actual conditions of the
production force of the primary stage of socialism. Only by doing that can we
promote the development of the production force. Some measures that are
employed in the reform, such as developing the market for production
materials, financial market, technological market and labor market, issuing
bonds and stocks, are all inevitable phenomena accompanying the
socialization of production and development of commodity economy, and are
not unique to capitalism.

The 1987 Party Report not only juxtaposed the “public ownership system” with other
“ownership types,” but also specified the forms of the “public ownership system:”
The “public ownership system” has many forms. Except for all-people
ownership and collective ownership, we should also develop public
ownership enterprises that are jointly established by all-people ownership
and collective ownership, as well as public ownership enterprises in which
various regions, government agencies, and enterprises buy each other’s
shares.

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Here the concept “public ownership system” was broken into many subcategories,
distinguishing between all-people ownership and collective ownership, as well as
ownership by different local governments and agencies. It indicated that the idea of
“who” owned the enterprises became an issue in need of clarification, as the central
government delegated its power to local authorities and state-owned enterprises and
as the economic exchange among different enterprises intensified.
The 1992 Party Report reiterated the idea that the “public ownership system”
was the main body of the economy, and introduced a new idea: the joint operation of
public ownership economy and other economic forms:
The system of socialist market economy is associated with the fundamental
system of socialism. On the structure of ownership, the public ownership
system, which includes all-people ownership and collective ownership, is the
main body; individual economy, private-operated economy, foreign-owned
economy are complements; many kinds of economic forms develop together
for a long time, and different economic forms can also jointly operate in
many ways on a voluntary basis. State-owned enterprises, collectively-owned
enterprises and other enterprises all enter the market, and state-owned
enterprises should play their guiding position through fair competition.

This Party Report acknowledged new enterprises with hybrid ownership forms.
Allowing state-owned enterprises to be partly owned by private enterprises or even
foreign enterprises represented the crossover of established boundaries between the
public ownership system and other economic forms. Hybrid ownership forms are
built on a new system which is called the “shareholding system” ( 股份制). The
concept “shareholding system” first appeared in the 1987 Party Report, which reads:

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The forms of the shareholding system that emerge in the reform, including
the state-dominate shares, and shares owned by agencies, regions, and
enterprises, as well as shares purchased by individuals, are a way of
organizing the financial assets of socialist enterprises, and can be continually
experimented. The property of some small all-people ownership enterprises
can be transferred to collectives or individuals with compensation.

The 1992 Party Report further explained the merits of the shareholding system and
encouraged its experiment and faster development. The emphasis of the 1987 and
1992 Party Reports on the shareholding system was driven by the fast development
of share issuance of thousands of enterprises, the establishment of the OTC market in
1987, and the opening of the stock exchange in 1990.
The 1997 Party Report made two innovative rhetorical moves that changed
boldly the meaning of “public ownership system.” First, it interpreted what it meant
to see “public ownership system” as the “main body” of the economy. This
interpretation re-positioned the “public ownership system” in the context of new
economic circumstances.
Whereas past Party Reports always stated that “public ownership system”
was the “main body” of the economy, they never specified how this statement
applied to the actual economic structure. The 1997 Party Report answered this
question:
We should understand the meaning of public ownership system economy in
its entirety. Public ownership system economy includes not only state-
owned economy and collective economy, but also the state-owned elements
and collectively-owned elements in the mixed ownership system economy.
The position of public ownership system as the main body is reflected
primarily in the following ways: public assets occupy the superior position in
the total assets of the society; state-owned economy controls the sinews of

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the nation’s economy and plays a guiding function in the economic
development. This is to look at the country as a whole; differences can exist
across regions and sectors. With regard to the superiority of public assets,
there should be superiority in terms of quantity, but more importantly,
attention should be paid to improvement in quality. The guiding function of
the state-owned economy is primarily reflected in its power to control. We
should adjust strategically the composition of the economy. For important
industries and key areas that are sinews of the nation’s economy, state-owned
economy must occupy the dominant position. In other areas, we can
strengthen the focal points and improve the quality of state-owned assets
through asset reorganization and structural modification. As long as we insist
on the public ownership system being the main body, the state controlling
the sinews of the national economy, and improving the controlling power and
competitiveness of the state-owned economy, some reduction of the weight
of the state-owned economy will not affect the socialist nature of our country.

In this interpretation of the public ownership system as the “main body” of the
economy, the Party made a series of new arguments. First, it emphasized the quality
of state-owned economy instead of quantity. This reorientation toward quality helped
justify the reduction of the number of state-owned enterprises in the economy.
Second, it indicated flexibility of the Party in allowing variations of the proportion of
state-owned economy in different sectors and regions. This differentiation helped
justify the fast pace of restructure and reorganization in many non-strategic sectors
and regions. Third, it stressed the power of the state-owned economy to control as
opposed to operate the economy. In the beginning of the reform, state-owned
enterprises were called “state-operated enterprises,” because there was no distinction
between owning and operating the economy. The reform in part separated ownership
from management. Starting from the 1992 Party Report, the official language
became “state-owned economy,” “state-owned enterprises,” and even “state-owned
assets.” It indicated the Party’s realization that ownership is a form of control, and

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the state needs not to operate those enterprises to ensure the public ownership system,
hence the socialist nature of the country.
The second innovation of the 1997 Party Report is the extension of the
concept of “public ownership system” to accommodate new cases. Specifically, the
1997 Party Report broadened the economic forms that can be called “public
ownership system” from purely state-owned and collectively-owned enterprises to
company stocks held by the state and collectives:
There can and should be diverse ways to materialize the public ownership
system. All kinds of ways of operation and forms of organization that reflect
the laws of socialized production can be boldly utilized. We should strive to
find ways to realize the public ownership system that can advance the
production force immensely. The shareholding system is a form of
organizing capital for modern corporations; it is conducive to the separation
of ownership right and operation right, and conducive to the increase of the
operating efficiency of the enterprise and capital; capitalism can use it, and
socialist can also use it. There should not be generalized statements about
whether the shareholding system is public-owned or private-owned; the key
is to see who has the controlling right of shares ( 控股权). When the state and
collectives control the shares, these shares have an apparent nature of being
publicly owned; this is conducive to enlarging the scope of dominance of
public capital, and enhances the public ownership system’s function as the
main body. Currently the numerous joint stock cooperative system economies
that emerge in urban and rural areas are a new phenomenon in the reform,
and should be supported and guided, the experience should be continuously
generalized so that the new phenomenon will be gradually perfected.
Collective economies, for which the joint labor and joint capital are main
forms, should be particularly advocated and encouraged.

This paragraph offered a new understanding of the “public ownership system” on the
basis of a new form – the shareholding system. Whereas the 1992 Party Report
acknowledged the existence of the shareholding system and the interpenetration of
different ownership structures, i.e., public ownership and private ownership, the

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1997 Party Report categorized explicitly company’s shares owned by the state and
collectives as part of the “public ownership system.” Maintaining the public
ownership system was critical for China to claim its socialist nature, but as more and
more state-owned and collectively-owned enterprises started to issue shares and were
restructured into shareholding companies, many began to question the ideological
nature of these enterprises. The 1997 Party Report resolved this question by
stretching the scope of cases that the concept “public ownership system” can cover.
Based on this new definition, the “public ownership system” not only applied to
companies owned completely by the state or collectives, but also to shareholding
companies with shares owned by the state or collectives. This way, as long as the
state or collectives own the shares of a shareholding company, that company has a
component of “public ownership.”
The 2002 Party Report further developed what it meant to be publicly owned.
For the first time, the concept “state-owned capital” appeared in Party Report,
suggesting the Party’s realization that the state needs not even to own material assets
such as factories and machines to claim public ownership. Instead, the state needs
only to own the capital by being the shareholder of a company to claim public
ownership. The 2002 Party Report reads:
Except for an extremely few number of enterprises that must be solely owned
by the state, the shareholding system should be actively promoted, and the
mixed ownership system should be developed. The investors should be
diversified, and the state will control the shares of important enterprises.

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The 2002 Party Report confirms that as long as the state is the controlling
shareholder of the company, the company is considered part of the “public
ownership system.”
The concept “public ownership system” remains a fundamental concept
throughout the reform period. However, the Party has changed both the intension and
extension of this concept through the casuistic practice of stretching. In terms of the
intension of this concept, the substantive meaning of this concept changes from
emphasizing the ownership of material assets such as factories, machines, and land,
to the ownership of capital assets, such as stocks. In terms of the extension of this
concept, the range of cases that can be covered by this concept extends from
enterprises solely owned and operated by the state and collectives to joint stock
companies with shares owned by the state or collectives. As China moves from the
logic of plan to the logic of market, many concepts that remain in use have been
stretched one way or another to fit and accommodate new cases.

DISCUSSION
Four Types of Casuistry
This essay focuses on the key concepts and slogans in the Party Reports and
outlines four types of casuistry that operate at the level of concepts and slogans. The
first type of casuistry is to dissociate the established meaning of a well-known
concept or slogan. Elements previously included in the concept are thus
problematized. For example, the debate on whether Mao’s words are the sole

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measure of truth disrupts the personality cult of Mao. The established belief is that
both are truth, but the debate dissociates Mao from truth, and thus de-emphasizes
Mao and elevates the importance of practice. Dissociation of established concepts
and slogans introduces new thinking by raising questions in the unquestionable. The
cauistic practice of dissociation seeks potential conflicts among seemingly coherent
interpretations, bringing in new ideas without denying completely old ideas.
The second type of casuistry is association. Contrary to dissociation, which
breaks down an established concept, association combines two concepts that are not
previously aligned or considered together to produce a new concept. Many slogans
that the Party propagated pertain to this type of casuistry. Two most prominent
examples are: adding “Chinese characteristics” to “socialism” to produce the
overarching name for the nature of Chinese society – “socialism with Chinese
characteristics,” and adding “socialist” to “market economy” to produce the all-
embracing term to describe the nature of the Chinese economy – “socialist market
economy.” Novel association of concepts manufactures concepts that are both deeply
rooted in the past and profoundly new. Concepts like these are connected to multiple
institutional logics and appeal to multiple audiences.
The third type of casuistry is substitution. In substitution, a concept is
replaced by another concept that seems to be the same but is also different in
important ways. The story that Chinese economist Zhang Weiying tells, in which
horses are replaced by “painted horses” and finally by “zebras,” is a substitutive
move. Similar moves in concepts used to describe the Chinese economy help ensure

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that the transition from one institutional logic to another is a continuation of the past
rather than interruption. For example, “planned economy” is replaced by “planned
commodity economy,” and finally by “socialist market economy.” For each
substitution, the new concept overlaps partially with the old concept, yet includes
significantly new elements. Each substitution of an old concept with a new concept
signifies a further step in the direction of the new institutional logic.
The fourth type of casuistry is stretching. Stretching changes a concept’s
intension and extension to include new properties and cases. For concepts that are
central to the ideological core and irreplaceable, stretching transforms them in order
to accommodate new practices and arrangements. These concepts remain in use in
the official vocabulary because they carry significant ideological weight: invoking
these concepts reaffirms ideological fidelity. However, these concepts would
constrain the adoption of new practices if their meanings were kept intact. The
Chinese leaders employed the casuistic practice of stretching to extend the meanings
of these concepts to include cases that do not manifestly belong to these concepts.
For example, “public ownership system” is retained as the fundamental concept of
China’s socialist economy, yet the concept has been continuously stretched to
encompass new material phenomena and organizational forms.

The Benefits and Costs of Casuistic Institutional Change
My analysis suggests that casuistic practices by the incumbent leaders often
accompany and facilitate a particular kind of institutional change, change that is

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radical under the disguise of being incremental. Leaders, in an attempt to initiate
radical change, employ the rhetorical strategy of casuistry to justify new practices
and arrangements on the basis of traditional values and logics. The potential benefits
of casuistic institutional change are: (1) the change is met with less resistance
grounded in traditional values and logics, (2) the change generates less interruption
and disruption to the established system, and (3) the change invites gradual buy-in
from the audience.
However, casuistic institutional change has its own costs. First, casuistry
exacts a cost on advocates who employ it. Burke points out that “casuistic stretching
can eventually lead to demoralization” (Burke, 1984[1937]: 229). Carlson (1992: 29)
notes that “casuistry can only ‘stretch’ so far before the guilt created by its violation
of hierarchy becomes nearly intolerable.” Leaders who practice casuistry
unsuccessfully are perceived by followers as hypocrites. Casuistry also creates
confusion among the audience because casuistic language is ambiguous. Leaders
attempting to appeal to opposite camps through casuistic practices may invite
criticisms from both sides. If leaders employ casuistry only to maintain their
legitimacy and power, their unwillingness to give up old institutional logics may
unnecessarily prolong the pace of transition and become a hurdle to the making of
new policies.

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China’s Market-Based Reform
China’s market-based reform has generated hybrid forms, mixed economies,
“half-way” institution, or “painted horses” (Hassard et al., 2002; Nee, 1992;
Steinfeld, 2007). Scholars describe China’s model as incrementalist or gradualist as
opposed to the shock therapy model of the Eastern European countries (Lai, 2006;
McMillan & Naughton, 1992; Stiglitz, 1994).
This essay complements these studies by explaining the symbolic forces that
drive this institutional transformation. The role of rhetorical casuistry in making
sense of and justifying China’s transition is not ancillary but integral to the
transition. Without comprehension and acceptance, the transition would truly be
chaotic. Close analysis of the actors and their arguments reveals the subtle nuances
in the symbolic meaning-making that accompanies the practices and arrangements of
the market reform.

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CHAPTER 4: CHARACTER: MANEUVERING THE LEADER’S
AUTHORITY

How does a state influence institutional change? Institutional theories often
describe a state’s institutional influence as residing in the symbolic and legitimating
power of its institutional position or its coercive control of material resources
(Bourdieu, 1991; DiMaggio & Powell, 1983; Donaldson, 1995; Scott, 1995).
However, classical wisdom suggests that the state uses more than just the coercive
and symbolic power of institutional position: it also utilizes the persuasive power of
an actor’s rhetorical imagination. As Weber observes, no rulers base their regime on
force alone; all engage in cultivating a belief in its legitimacy (Weber, 1968).
Following Weber, Bendix argues that institutional authorities rarely command
without a higher justification and followers are seldom docile enough not to provoke
such justification (Bendix, 1974).
A strand of recent institutional research resonates with these classical ideas
and suggests the importance of rhetoric and persuasion in the construction of
legitimacy and institutional authority (Green, 2004; Green et al., 2009; Suddaby &
Greenwood, 2005). Specifically, Green (2004) and Suddaby & Greenwood (2005)
propose a perspective that makes rhetoric central to the process of constructing
legitimacy and institutions.
A rhetorical perspective seems particularly useful when one aims to
understand how the state legitimates radical institutional change – change that

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potentially contradicts its legitimate authority and social position. This essay
proposes that the symbolic construction of ethos is key to accomplishing this task.
Ethos is the character, image, or credibility of the speaker, and when used to
persuade audiences is essentially an appeal to the social relationships and identities
shared by the speaker and audience.
There are two aspects to ethos: 1) extrinsic ethos; and 2) intrinsic ethos.
Extrinsic ethos refers to the symbolic influence that derives from the state or
speaker’s prior social relationship with the audience. Most sociologists conceptualize
extrinsic ethos as the power or influence of words derived from the social position of
the speaker. The focus of this essay is on intrinsic ethos. Intrinsic ethos is the
symbolic influence of social relationships and identities that are rhetorically
constructed in the text or speech itself. Sociologists and neoinstitutionalists often
ignore intrinsic ethos. Yet intrinsic ethos plays an important and critical role for
speakers in most social situations and especially for actors attempting to establish
radical institutional change.
To demonstrate how leaders build ethos through rhetorical maneuvering, I
apply Aristotle’s trichotomy of rhetorical genres to analyze how a highly embedded
actor created and institutionalized controversial practices that contradict the
ideological core of the actor. Specifically, I examine how the Communist Party of
China (CPC) created and institutionalized China’s stock market. China is a state
which adheres to principles of Marxism, yet has adopted one of the quintessential
institutional practices of capitalism: a stock market. This case study provides an

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opportunity to examine how the state rhetorically constructs its ethos in order to
promote radically new institutional arrangements. I first outline central theoretical
arguments, then present a case analysis, and conclude with a discussion of the
theoretical and practical implications of this model.

THEORETICAL PREMISES
Three theoretical observations inform this essay. First, actors exist in multiple
and potentially conflicting institutional fields and social roles, and agency develops
from exploiting conflicts and toggling among these roles (Emirbayer & Mische,
1998; Friedland & Alford, 1991; Sewell, 1992). Second, institutional theory has
failed to explain adequately how agency develops from the toggling between
institutional fields or social roles. Specifically, most approaches emphasize the
context or conditions that make agency and change possible (Battilana, 2006;
Dorado, 2005); however, these approaches fail to describe explicitly how actors use
their social skills to leverage one field or set of relationships relative to another.
Third, the field of rhetoric suggests that institutional agency involve the exploitation
between conflicting social roles through a linguistic process closely related to the
construction of ethos

Agency as the Exploitation of Conflicting Social Relationships
Institutional theorists suggest that society consists of multiple and potentially
conflicting institutional fields and logics (Bourdieu, 1990; Friedland & Alford, 1991;

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Sewell, 1992). Actors embedded within these fields are conceptualized as having
multiple social roles, positions, and identities (Boxenbaum & Battilana, 2005; Rao,
Monin, & Durand, 2003). This provides a condition or context for the development
of agency (Bourdieu, 1991; Boxenbaum & Battilana, 2005; Clemens & Cook, 1999;
Creed, Scully, & Austin, 2002; Friedland & Alford, 1991; Rao et al., 2003; Sewell,
1992). For example, institutional agency or change comes about by social actors
using the multiplicity of logics to transfer logics from a field outside the focal
institutional field (Durand & Jean, 2005; Haveman & Rao, 1997; Leblebici et al.,
1991; Thornton, 2002). Similarly, social actors use the multiplicity of roles and
positions to appeal to multiple social groups (Maguire et al., 2004), and thus enhance
their legitimacy and ability to mobilize diverse stakeholders for change. In addition,
scholars suggest that the simultaneous possession of multiple social roles, positions,
and identities may facilitate the actor’s self-conscious articulation of roles (Coser,
1975; Emirbayer & Mische, 1998: 1007).

Social Skill and How Agency Takes Place
Although these approaches to institutional agency describe the conditions that
may lead to agency, they fail to explain explicitly how agency takes place. The
existence of multiple and conflicting institutional fields and logics does not
necessarily lead to agency. Agency develops only when actors self-consciously
articulate and intentionally exploit their roles and identities (Coser, 1975; Emirbayer
& Mische, 1998). A recent research has highlighted a more proximate explanation of

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agency in “social skill,” which allows actors to identify and articulate contradictory
identities and logics to induce cooperation among others (Fligstein, 1997; Hardy &
Maguire, 2008; Perkmann & Spicer, 2007; Zilber, 2002). However, scholars know
little about what these social skills are or how they operate.
The reason for the lack of understanding may result from how scholars
conceptualize an actor’s social skills and social relationships. Sociologists define
social skill as “the ability to motivate cooperation in other actors by providing those
actors with common meanings and identities in which action can be undertaken and
justified” (Fligstein, 1997: 398). Moreover, sociologists theorize that social skills
derive their power from the actor’s social position (Fligstein, 1997: 398). Bourdieu’s
theory is perhaps most representative of this view. Bourdieu’s conception of habitus
emphasizes linguistic habitus as importantly conditioned by the structured space of
positions and social relationships (Bourdieu, 1977). Based on this view discourse is
authoritative because it is uttered by a speaker who already enjoys the authority and
legitimacy to pronounce it. Hence the important social skill of rhetoric or the
intentional manipulation of symbols to induce cooperation among others (Burke,
1969 [1950]), derives its power not from the “specifically linguistic substance of
speech” but from the fact that the speaker is an “authorized representative” vested
with the power to speak in a given social relationship or position (Bourdieu, 1991:
107-111). Bourdieu’s conception of social position thus privileges social position
over agency and discourse. Within this framework the power of language derives
from the social status-position of the subject within social circumstances. This

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framework emphasizes how social positions constrain and reproduce social orders,
while underemphasizing the power of language to shift and change social positions.
Accordingly, it tends to ignore how symbolic power can derive from the discursive
construction of social position (Amossy, 2001).

Intrinsic Ethos and a Rhetorical Understanding of Social Positions
A rhetorical perspective emphasizes that actors utilize the social skill of
rhetoric to shape and influence social relations and social actions. Specifically,
rhetoric is the intentional art of using symbols to produce social action. For
persuasion to take place the audience must "identify" with the speaker, such that the
audience sees that they are like the speaker in some way or another (Burke, 1969
[1950]). Classical rhetorical theorists often used the concept of ethos to describe
identification (Jasinski, 2001: 231). Ethos is conceptualized as the character, image,
or credibility of the speaker, and is essentially an appeal to audience to identify.
Classical rhetoric often uses the term ethos to refer to both extrinsic and intrinsic
ethos. When the speaker’s identity derives from the speaker’s prior social
relationship with the audience, it is often referred to as extrinsic ethos. The speaker’s
identity that is rhetorically constructed in the text or speech itself is called intrinsic
ethos. Contemporary scholars argue that the speaker develops his or her ethos by
discursively navigating social identities, images, and relationships that are commonly
recognized, accepted, and believable by the audience (Amossy, 2001; Perelman &
Olbrechts-Tyteca, 1969). Whereas Bourdieu’s work suggests that discourse shapes

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the world because of the institutional position of the speaker and her utterance in the
correct institutional situations, in a rhetorical perspective ethos is more than the pre-
existent credibility, position, or relationship of the speaker to the audience, it is also
the intentional and active power of the speaker to shape his or her credibility and
social relationship to the audience through discourse. This rhetorical conception of
ethos resonates with the organizational literature on the linguistic construction of
social identity (Creed et al., 2002; Czarniawska, 1997; Glynn, 2008; Lounsbury &
Glynn, 2001; Maguire & Hardy, forthcoming; Rao et al., 2003; Rindova, Pollock, &
Hayward, 2006), a discursive conception of positions (Harré & Langenhove, 1999),
and the use of language to shape organizational legitimacy (Elsbach, 1994; Elsbach
& Elofson, 2000). In sum, where Bourdieu emphasizes that social positions and
social structures are fixed and stable, Aristotle and a rhetorical perspective
emphasizes that social positions and structures are malleable and fluid.
A rhetorical conception of social position enables an investigation into how
the state can use language to change and shape its social position and institutional
authority. Building on these insights, this essay argues that an important aspect of
state power is the state’s ability to discursively build and change its ethos or social
position. While acknowledging the symbolic and coercive power vested in the the
state, this essay suggests that the state as change agent or institutional entrepreneur
uses rhetoric to shape ethos and thus legitimate institutional change while preserving
its own legitimacy.

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Ethos Construction through Three Genres of Rhetoric
As the established incumbent, it is hard for the state to legitimate change that
contradicts its own principles and policies. The central question of this essay is how
the state as a highly embedded actor advocates radical institutional change to
existing structures and social relationships without coercion and without sacrificing
the legitimacy and authority of its own institutional status.
Specifically, this essay argues that Aristotle provides a useful rhetorical
framework for understanding ethos construction. Aristotle divides all rhetoric into
three genres: the epideictic, the forensic, and the deliberative. This rhetorical
framework is particularly suited to this investigation for three reasons. First, it is
distinctively political and deals explicitly with situations of disagreements and
conflicts (Aristotle, 1991; Poulakos & Poulakos, 1999). Second, this framework
explicitly deals with intrinsic ethos or the specific rhetorical strategies for why an
audience listens to a speaker, finds that speaker credible, and/or identifies with that
speaker (Aristotle, 1991). Furthermore, this framework resonates with important and
well understood typologies of legitimation and institutions used in neoinstitutional
theory.
Aristotle’s division of rhetoric into three genres is based on three types of
audiences or reasons why an audience listens to or identifies with a speaker
(Aristotle, 1991). Aristotle argues that in epideictic discourse the audience is a
spectator of the present and thus listens to or identifies with the speaker because they
want to know how things are (Aristotle, 1991: 80). With forensic discourse the

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audience is a judge of past and thus listens to or identifies with the speaker because
they want know what happened (Aristotle, 1991: 80). With deliberative discourse the
audience is the judge of the future and listens to or identifies with the speaker
because they want to know how things will be (Aristotle, 1991: 80).

Epideictic rhetoric
Epideictic rhetoric is meant to display. Display involves the revealing of
ideals and values that are deeply held yet seldom noticed and acknowledged by the
public. By celebrating these intangible ideals that bind the community together,
epideictic rhetoric fulfills the function of inviting audiences to recognize and
reaffirm the greatness of these ideas and customs (Perelman & Olbrechts-Tyteca,
1969).
Aristotle observes that epideictic rhetoric involves praise or denigration, and
aims at honoring or censoring. Contemporary rhetorical scholars further specify the
function of epideictic reasoning as that of definition and education (Condit, 1985;
Johnson, 1970; Sullivan, 1991). Epideictic rhetoric educates the audience of the
particularity of the values, beliefs, and cultures of the community and, produces
consensus. Epideictic rhetoric, like all rhetoric also produces identification:
symbolically connecting individuals together so that they attain some position in the
hierarchy of social relations (Burke, 1969 [1950]). Epideictic rhetoric produces
identification because it shares mutual understandings and knowledge about the
world, and thus positions the speaker into the role of educator and the audience into

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the role of student. The rhetorical production of identification is a critical aspect of
ethos (Farrell, 1993), how actors build social cohesion through language (Burke,
1969 [1950]), as well as how actors produce legitimacy (Metzler, 2000).
By praising and honoring, epideictic rhetoric also highlights the taken-for-
granted ideas of the community, thus reinforcing adherence to commonly held
values. Epideictic rhetoric creates and defines a world of realities, and invites the
audience to judge the truth or verisimilitude of the speech (Sullivan, 1993). Ethos
and credibility are maintained for the state because epideictic rhetoric educates. The
audience as spectator listens and identifies with the speaker because they want to
know how things are (Aristotle, 1991). By emphasizing display, definition, and
education about the values and beliefs of society, epideictic rhetoric also is uniquely
placed to surface as well as foreground or background new social identities and/or
fields of reasoning within society.

Forensic rhetoric
Forensic rhetoric is meant to judge right from wrong. It is the rhetoric of
prosecution and defense (Poulakos & Poulakos, 1999). The rhetoric of prosecution
and defense judges past actions and arrangements as either right or wrong, or just or
unjust. It intends to make judgments about the wrongdoers and wrongdoings, such as
voluntary illegal harm, crime, tort and breach of contract (Aristotle, 1991). Aside
from the written law, the standards of justice based on which the speaker makes
claims also encompasses the principles of greater equity and justice. Forensic

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rhetoric produces identification because it emphasizes mutual wrongs and injustices
enacted against the speaker and the audience. This positions the speaker into the role
of prosecutor and audience into the role of judge (Aristotle, 1991).
“Any time we seek to determine what occurred, and whether it was right or
wrong, we are reasoning along forensic lines” (Herrick, 2005). When we apply our
standards and beliefs to evaluate the justice of a regulation, when we invoke widely
held values to argue the fairness of a particular organizational practice, when we
draw from moral principles to judge the righteousness of a symbol or cultural model,
we are reasoning forensically.
The audience as a judge of the past listens and identifies with the speaker or
state because they want to know what happened (Aristotle, 1991). Through the
prosecution of wrongdoers forensic rhetoric emphasizes morality, ethics, and justice.
By emphasizing fairness, justice and morality, forensic rhetoric is uniquely
positioned to juxtapose or resolve contradictions between social identities and/or
fields of reasoning through direct confrontation.

Deliberative rhetoric and pragmatic legitimacy
Deliberative rhetoric is meant to weigh the advantages and harm from
alternative courses of political or social action (Aristotle, 1991). Deliberative rhetoric
is future oriented, which aims to decide what should be done. Deliberative rhetoric is
found on the basis of practical wisdom of the participants and on the pragmatic
benefit of the decision. Deliberative rhetoric often builds on the image of speakers

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and audiences as rational decision makers. “Deliberation is not about the end but
about the means to it, which are the measures that are practically expedient
(Aristotle, 1991).” It weighs the benefits and costs of alternatives in order to
determine the most advantageous and expedient course of action. Deliberative
rhetoric produces identification because it rationally calculates the outcomes of
collective or mutual action, and thus this genre often positions the state in the role of
the leader or manager and the audience in the role of worker or follower. Under
conditions of limited time and knowledge, deliberative rhetoric does not seek to
reach perfection but executable plans. Although the ultimate goal of deliberation is
human well-being, happiness, or fulfillment, deliberative rhetoric focuses on coming
up with the immediate resolution to urgent matters. At the heart of deliberation is an
urge either to do or not do something (Aristotle, 1991).
Ethos and credibility are maintained by the state because deliberative rhetoric
makes predictions about the future outcome of particular choices of action. The
audience listens or identifies with the speaker because they want to know how things
will be (Aristotle, 1991). By emphasizing rationality, calculation, and pragmatic
benefits, deliberative rhetoric is uniquely suited to juxtaposing and resolving
contradiction between new social identities and/or fields of reasoning. In addition,
deliberative rhetoric may also reflect the initial stage of acceptance of new social
relationships and identities and thus promoting a focus on actions and behaviors
within a set of social relationships.

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METHODS
Rationale
The building and adoption of a stock market by the Communist Party of
China represents the most radical market-based reform as the nation transforms from
the logic of centrally planned economy to the logic of a market economy. As
transition economists point out, the building of the stock market in transition
economies indicates both the creation of new institutions, and a more profound break
with the institutions of the previous era (Akimov & Dollery, 2008). A less radical
approach to reforming the financial system of transition economies is to focus on a
bank-dominated system. Some economists support the less radical approach because
they believe that the stock market is incapable of helping transition economies
achieve promised levels of economic growth and prosperity for companies,
investors, and the financial system (Arestic, Demetriades, & Kuintel, 2001; Singh,
1997).
If the adoption of a stock market in post-communist countries represents a
radical institutional change, the building of a stock market in communist China
signifies an even more radical change, almost a paradox in the eyes of many
observers (Green, 2003). In China’s transition from a planned economy to market
economy, the legitimation problem is more than the problem of legitimating the
market institution. The legitimation problem also encompasses the existence of a
market economy under the authority and control of a communist state. The literature
on transition economies concludes that China’s reform has taken a gradualist

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approach compared to the shock therapy model of the Russian Federation (Litwack
& Qian, 1998; McMillan & Naughton, 1992). This essay suggests that China’s
transformation may be more radical than commonly understood. What distinguishes
China from most other transition economies is that: 1) China has never abandoned
the ideology of communism and Marxism; and 2) China is arguably the first among
transition economies to adopt a stock market – the most capitalist of institutions.
As I explore the arguments, debates, and stories surrounding China’s stock
market, what is striking is the degree of circumspection, complexity, and creativity in
the political discourse over adopting a stock market. China’s state actors did not
simply adopt and implement this stock market institution. They put forth reasons and
justifications for the establishment of the stock market. These reasons and
justifications encode the rhetorical strategies that the state utilizes to legitimate itself
as well as the stock market institution.

Data Collection
Data collection proceeded in two phases. First, I read extensively secondary
accounts of China’s stock market in the form of historical accounts and scholarly
works in English and Chinese (Green, 2003; Li, 2001; Walter & Howei, 2006). To
supplement my reading, I conducted in-depth interviews with knowledgeable
individuals, including three officials from China Securities Regulatory Commission
(CSRC) and Ministry of Commerce, five professors and researchers specializing in
China’s financial markets from universities and the Chinese Academy of Social

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Sciences, seven investor relations professionals of companies listed on China’s stock
exchanges, and a senior fund manager of one of the biggest mutual funds in China.
In combining my knowledge from the readings and the interviews, I identified the
most dramatic and ritualistic moments in the history of China’s stock market, and
located relevant texts for analysis.
In the second phase of data collection, I collected the rhetoric of the state
from three sources. The first source consists of Reports of the Central Committee of
the Communist Party of China from 1978 to 2007. The year 1978 marked the
beginning of the “reform and opening up” era. The CPC Congress Reports are
delivered by the General Secretary of the CPC Central Committee every five years at
the National Congress of the Party. These reports are considered the integration of
the thoughts of the top leadership and all Party members. They embody the most
important and systematic statement of the principles, intentions, and strategic visions
of the Party. As researchers point out, understanding the rhetorical artifacts in these
documents is the proper place from which to begin any detailed analysis of China’s
economic and political life (Kluver, 1996).
The second source contains speeches by top leaders of the Party during the
same time period. Top Party leaders, such as Deng Xiaoping, played instrumental
roles in leading China’s market reform. The speeches by top Party leaders usually
appear in official media outlets and are often studied by Party members as important
policy documents. These speeches typically focused on specific issues and problems

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as they emerged during the reform process. They are elaborations, extensions, and
applications of the principles and spirit of the Party Reports.
The third source consists of articles on China’s stock market published in the
People’s Daily. The People’s Daily is a national daily newspaper directly owned and
controlled by the CPC Central Committee. As a Party organ, the People’s Daily
represents the most authoritative voice of the Party. It is the most widely circulated
daily newspaper in China. More importantly, Chinese people read this newspaper
looking for the messages of the Party as well as indicators of the political and policy
climate of the state. Different kinds of articles, such as editorials, commentaries, and
opinions published in this newspaper have different degrees of authoritativeness. But
all articles are reviewed and approved by the top Party organ. Therefore, articles in
the People’s Daily represent the collective beliefs and sentiments of the state
apparatus. The People’s Daily is available electronically. I searched electronic
articles on China’s stock market in the People’s Daily database. The search string
consisted of “China’s stock market” or “China’s securities market” or “China’s
capital market.” This search string captured all the articles in the People’s Daily
database that dealt explicitly with China’s stock market. The search resulted in 280
articles. 12 articles were deleted since they were tangential to the subject matter (i.e.
mentioned China’s stock market only incidentally). The final database contained 268
articles, ranging from 1991 to 2005. Figure 4.1 shows the number of articles for each
year in the sample.

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FIGURE 4.1: Number of Articles on China’s Stock Market in People’s Daily

Taken together, these three sources comprise a comprehensive collection of
the state’s rhetoric. The CPC Congress Reports indicate the state’s most overarching
and strategic rhetoric on the stock market. The speeches by top Party leaders deal
with more concrete and context-specific issues with regard to the stock market. The
articles in the People’s Daily faithfully conform to the first two sources in reporting
and commenting on the stock market. These discourses represent the discourse of the
state. To say that the state employs rhetoric is not to reify or anthropomorphize the
state as a homogenous single conscious actor. The Chinese state consists of political
factions, and cannot be reduced to an individual actor. Here the conception of the
state emphasizes state actions and discourse as a negotiated consensus between
0
5
10
15
20
25
30
35
40
45
# of Articles
Year
Number of Articles

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political factions and individuals in order to advocate, coordinate, and execute
policies and plans. Ultimately the discourse reflects the negotiated consensus of the
leaders and individuals that make up the state and this negotiated consensus is
conceptualized as a social actor that possesses capabilities and acts more or less
purposively (Hall & Ikenberry, 1989).

ANALYSIS
To examine changes in the rhetoric of the state this essay employs both a
qualitative and a quantitative method. The qualitative analysis illustrates the three
rhetorical genres that the state used to justify and legitimate its ethos, authority, and
proposed policy to adopt a capitalist stock market. The qualitative analysis also
includes specific examples of how the state toggled social identities or fields of
reasoning in order to shift or critique established social positions thus making room
for new social relationships or justifying the use of these new social relationships.
The quantitative method analyzes the data obtained from the People’s Daily to
describe the significance of how these genres evolved over time as the stock market
developed.

The Task of the State in Legitimating the Stock Market
Although highly institutionalized and successful from today’s standpoint, the
development of the stock market was accompanied with confusion, ambiguity, and
conflict. Initially the stock market was considered a quintessential part of a modern

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capitalist market. Therefore, it represented an institutional logic that was considered
in direct contradiction to the institutional logic of a communist country. The
contradictions between institutional logics are reflected in various ways throughout
the development of the stock market. For example, in the early years, people had
little knowledge about what a stock market was and how it worked, and thus
intentionally stayed away from it because most associated the stock market with
capitalism and perceived it as politically risky. Even when the stock market was
formally established, very few people became investors. Most people, if they were
interested in the stock market at all, remained observers. Companies were not active
participants either. When the Shanghai Stock Exchange opened for trading, there
were only two stocks. For the first two years, most companies that listed on the stock
markets were collectively-owned enterprises, not state-owned enterprises (SOEs)
because many SOEs saw the listing as an ambiguous and potentially risky action.
The state faced the challenge of legitimating the stock market while at the
same time not losing its own ethos as a socialist and communist state. To do that, it
needed to deal with the inconsistencies and contradictions that exist between these
different institutional logics, ideologies, and political interest groups. Accordingly,
the state was very active in defining, shaping, and leading the development of the
stock market. In fact, many labeled China’s stock market a “policy market”,
indicating the extent of state involvement in the stock market. The focus here,
however, is not to evaluate whether the “policy market” is good or bad, but to
examine how the state dealt with the confusion, ambiguity, and contradictions in

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legitimating this radical institutional change. The qualitative analysis is organized
around three rhetorical genres that the state employed to legitimate the stock market
as well as its own ethos.

The State as Educator
During the early years of the stock market development, many citizens
simply ignored it due to confusion and lack of understanding about the stock market.
As a result, the trading of stocks was very limited almost to the point of being
inactive. More damaging to the fate of the stock market were the challenges from
conservatives, ideologues, and many citizens. They questioned whether it was
appropriate to set up a stock market in a socialist country. Political conservatives
believed that creating a stock market would stir the sense of inequality in society,
create a parasitical social class that makes a living by getting dividends, and
fundamentally change the public ownership and the socialist way of resource
allocation. A stock market represented retrogression from socialism to capitalism.
Labeling a practice as capitalist was a serious and negative ideological charge. It was
apparent that if the conservatives won the argument, the creation and use of a stock
market would never attain legitimacy in China.
Confronted with the legitimacy question the state attempted to engage their
audience over core definitions of Marxism, capitalism, markets, and socialism. An
encounter of one Chinese official in charge of the OTC market with foreign
reporters, may best demonstrate how state actors began to skillfully justify the stock

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market in the context of great ambiguity and sensitivity. The establishment of the
official OTC market in 1986 stirred up a great deal of curiosity for foreign observers.
The officials at the OTC market became the spokesperson for these new set of
practices and they faced some challenging questions from foreign reporters. The
following question is representative of the kind of legitimacy challenges facing the
state (Li, 2001).
Question from a foreign reporter about the Chinese trading of stocks:
You believe in Marx. In Capital, Marx said that, “In this kind of gambling,
small fish are swallowed by sharks, and sheep are swallowed by wolfs.”
What do you think of this?

The official replied:
Marx also said, “Without stocks, there probably still wouldn’t be railways in
the world.” As long as we manage it well, we can prevent what you said from
happening.

The official’s answer to this question is a form of epideictic rhetoric. In this question
the official is faced with a challenge to the legitimacy of a stock market in a system
based on Marx’s ideas about how stock markets work. In replying to the question the
official uses Marx’s own words to justify the practice of buying and selling stocks.
By citing Marx, the Chinese official presented an alternative definition of Marx’s
view on the stock market.
Consistent with the rhetoric of this official, the state refrained from engaging
in the debate about whether it was right or wrong to build a stock market. In fact,
Deng Xiaoping used the phrase “no debates” to express his attitude. He argued that

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debates would complicate things, and the time that was spent on debating should be
spent on boldly experimenting and making breakthroughs (Deng, 1993: 374). If the
“no debate” attitude indirectly addressed the apparent contradiction in having a stock
market in a socialist country, Deng Xiaoping further offered a more direct and
powerful justification for adopting the market. For instance, on many occasions
Deng stated that poverty is not socialism or communism. He said,
The ideal of Marxism is to accomplish communism. … The communism that
Marx talked about was a society with extremely abundant material goods
(Deng, 1993: 228). How can we say something like poor socialism and poor
communism? … We first must get rid of poverty and backwardness, greatly
develop our production force, and demonstrate that socialism is superior to
capitalism (Deng, 1993: 224).

Deng’s arguments exposed the inconsistencies and contradictions between what was
going on in China and what was the ideal of communism. It forced the audience to
contrast the “ideal” of Marxism which is a society where everybody is rich with the
condition of China’s society where no one is rich. By pointing out that China was
poor, Deng pushed into the foreground the important goal of attaining an affluent
society as well as the important Chinese social identity and field of reasoning that
suggests “that it is good to be rich.” The identity of being rich was considered by
popular belief to be the basis for nobility in traditional China. In contrast, the identity
of being poor was regarded as an honor after China turned to communism. Not
surprisingly, the introduction of market reform and new understanding of
communism coincided with the rise in the positive identification of wealth and the
negative identification with poverty.

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Deng further emphasized that affluence was in fact evidence of the
superiority of socialism over capitalism, thus directing attention to the problem of
poverty. At this point, the problem of poverty, not ownership, nor exploitation,
became the biggest hurdle for China to claim its Communist identity. Deng
essentially toggled between two identities of China: a communist country that is poor
and perhaps ideologically anti market versus a communist country that was rich and
ideologically successfully Marxist. The toggling helps the citizens to realize which
identity is actually desired and worth working towards.
The above example illustrates how the state surfaced and contrasted
important social identities of the Chinese people: the social identity of a strong
prosperous country is contrasted with the identity of a communist ideologically
against capitalist tools. Similarly, another example provides more evidence of
rhetorically referencing lines of reasoning contained in communism and socialism. In
a meeting with Gorbachev in 1989, Deng Xiaoping acknowledged that no one really
comprehended Marxism and socialism. He said,
For many years, there has existed a problem with the understanding of
Marxism and socialism. From the first Moscow conference in 1957 to the
early half of the 1960s, the Parties of China and the Soviet Union conducted
intensive debates. I was one of the people in the debate, and played a
nontrivial role. After more than twenty years of practice, when we looked
back, we saw that both had many empty words. After more than a hundred
years after Marx died, we haven’t apprehended what exactly changed, and
under the conditions of change, how to understand and develop Marxism
(Deng, 1993: 291).

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Deng’s astonishing honesty challenged the taken-for-granted assumption that China
as a socialist country must know what socialism is. As the mastermind of China’s
reform, Deng’s public admission that he did not even fully understand Marxism
called many things into question and in the mean time effectively opened up the
ground for new definitions and understandings. It is also an implicit critique of the
conservatives’ attempt to shut down the market in the name of staying faithful to
socialism and communism. This in turn, entailed the possibilities of
experimentations and explorations. If no one is sure about the correct understanding
of Marxism and socialism, then differences in understanding are both legitimate and
prudent.
In addition to challenging the established notion that there is an orthodox
Marxism, Deng proffered his own understanding of the relationship of socialism to
markets, and more specifically, how to view the stock market. Deng commented
about the stock market in his famous tour of the south in 1992, as follows:
The fundamental difference between socialism and capitalism does not lie in
more planning or more market. Planned economy is not equal to socialism –
capitalism also has planning. Nor is market economy equal to capitalism –
socialism also has a market. Both planning and market are economic means.
… Planning and market mechanisms that serve socialism are socialist;
whereas planning and market that serve capitalism are capitalist (Deng, 1993:
373).

Before Deng’s formulation, socialism was in direct opposition to capitalism, and
planning was associated with socialism, and the market was associated with
capitalism. Within this framework socialist planning stood in direct opposition to

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capitalist markets. Deng’s theorization separated these taken-for-granted
associations by arguing that the market is simply an economic means to achieve
socialist ends. The rhetorical brilliance of this argument is that it re-defined the
understanding of how the market relates to socialism. This articulation successfully
justified the introduction of market logics into a socialist country – while remaining
faithful to socialism. It surfaced certain lines of reasoning common to socialism and
capitalism that were previously in the background. Deng argued that lines of
reasoning currently in the foreground of socialism (e.g., planned economy) were in
fact either incorrect or subservient to other lines of reasoning (e.g., markets as a
means to an end). Consistent with this new line of reasoning, Premier Li Peng made
a dedication to the Shenzhen Stock Exchange during his visit to the exchange in
1993, which reads, “Strive to manage the Shenzhen Stock Exchange well, in order to
serve the socialist market economy (SZSE, 1993).” Furthermore, this rhetorical
move changes the social identity of communism such that new sets of social
relationships are possible and legitimate (e.g., corporations with shareholders,
managers, employees, traders, securities analyst, etc.). This also creates a context for
constructing a new identity for China’s economic system as a socialist market
economy: socialism with Chinese characteristics.
Epideictic rhetoric clarifies concepts, defines categories, and shapes the
audience’s understanding and comprehension of the world. Through the use of
epideictic rhetoric, the state creates its own ethos as a knowledgeable and wise
speaker who has deep insights about what is taken for granted, what are shared

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values, and what are the current problems. The speaker introduces new forms of
thoughts, challenges taken-for-granted understandings, and enriches the breadth and
depth of the knowledge of the audience. Moreover, the state’s use of epideictic
rhetoric produces identification and positions the state as educator and the Chinese
citizens as student. This helps the state establish both authority and cognitive
legitimacy. The underlying rationale is that before actors make moral judgments or
initiate an action, they need to comprehend and understand what they are dealing
with. When the state speaks in a language of learning and knowing, it creates a
context for the production and acquisition of cognitive legitimacy. In this new
context, the state is no longer seen as a communist regime that is at odds with the
stock market institution, but as learner seeking truth and knowledge, an expert
probing into the correct understanding of orthodoxies, and an inquirer looking for
answers to some profoundly difficult questions.
In fact, many of the articles published in the People’s Daily introduced
knowledge about the stock market: its functions, players, and rules. These articles
defined the basic concepts of the stock market, described a variety of new social
relationships, featured opinions from experts, and reported stories describing
investor’s experiences investing and trading in stocks.

The State as Prosecutor
The People’s Daily has published only two front-page, headlines, “Special
Guest Commentaries” in the entire history of the stock market. These two Special

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Guest Commentaries have become the most dramatic and memorable events in the
minds of Chinese investors. They were published at moments of great uncertainty
and they sent strong messages that had a profound impact on the stock market. The
first “Special Guest Commentary” on December 16, 1996 caused the market to
plummet from its peak. The second one on June 15, 1999 was credited for setting in
motion a two-year long bull market. Although the two Special Guest Commentaries
are distinctly different in their tone and style, they each made a huge impact on the
discursive and interpretive landscape. In this and the next sections I analyze in
greater detail the 1996 and 1999 commentaries as quintessential examples of forensic
and deliberative rhetoric respectively.
The 1996 article appeared against a background of a roaring market. After
two years of a bear market, the stock market saw a powerful upward movement in
the market from April 1996 to December of 1996. This rapid rise in price in such a
short period raised concerns for the Chinese Securities Regulatory Commission
(CSRC) that the stock market was overheating. With the intention to cool the market,
the CSRC wished to signal a tightening of control and thus issued several rules and
reports on strengthening the monitoring and supervision of investment banks,
brokers, and the movement of the stock market. The commission also repeatedly
issued warnings about improper speculation, irresponsible comments by securities
analysts, and potential illegal trading in the market. In addition, the director of the
commission stated publicly that speculative behavior was bad for the market. Even
more serious, the CSRC began to prosecute some commercial banks that violated

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rules for registering new securities. As one noted historian of China’s stock market
observed, the government sent altogether 15 warnings to the public (Li, 2001).
However, these signals did not seem to put a brake on the soaring market.
On December 15, 1996, the Chinese Central Television (CCTV), a state
organ, broadcasted a segment on its nightly news. This segment, entitled “The
Correct Understanding of the Current Stock Market,” was broadcast every hour for 7
times that night, and was published as a front-page Special Guess Commentary in
The People’s Daily the next morning. One of our interviewees remarked that he still
remembered the stiff face of the news anchor who delivered the segment.
This nightly news segment and the subsequent print article were like a bomb
dropped on the market. All of 614 stocks, including A shares, B shares and funds,
plummeted to the 10% downward price limit the morning of December 16. This fall
in prices continued for several days. In addition, the sharp downward trend extended
for the rest of that year. The magnitude of this discursive state intervention was
enormous and the vast majority of our interviewees mentioned this dramatic event as
an important turning point in the development of China’s stock market. Figure 4.2
graphs the move of stock market indexes before and after the publication of this
article.
1

1
Ironically, this discursive event is still ever present in the collective psyche of the market. In fact, a
fake People’s Daily commentary circulated on the internet in April 2007 had a tremendous effect on
the market.

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FIGURE 4.2: Movements of Market Returns around the Special Guest
Commentary on Dec. 16, 1996

People were curious as to who had authored this article. Rumors at the time
named then Vice Premier Zhu Rongji as the author of this piece (Green, 2004). This
mystery was solved when Zhou Zhengqing, the third CSRC chairman from July
1997 to February 2000, admitted in 2003 that he wrote the 1996 special guest
commentary as well as the 1999 guest commentary (Li, 2003). At the time when
Zhou wrote these commentaries, he was the director of State Council Securities
250
300
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400
450
500
550
2500
3000
3500
4000
4500
5000
5500
-20 -10 0 10 20 30
Shenzhen A-Shares Simple Average Index
Shanghai A-Shares Simple Average Index
Event Date: Relative to 12/15/1996
Shanghai A-Shares Shenzhen A-Shares

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Committee (SCSC), the government authority of CSRC in the State Council. In
addition, several experts suggest that the Vice Premier Zhu Rongji must have
approved these commentaries considering the significance of publishing this kind of
article in the People’s Daily. Many of our interviewees also suggested that the
publication of these commentaries needed the approval from at least the Premier Li
Peng, or even the Party Chief Jiang Zemin.
The 1996 commentary used forensic rhetoric extensively. In fact, the state
makes extensive arguments about why the abnormal rise of the market was due to
the wrongdoings of some market actors. The article identified four major players in
the marketplace: State-owned enterprises (SOEs), banks, securities companies, and
the media. The article blamed banks for lending money to firms as a way to flood
capital into the market, thus moving the prices up. It accused securities companies of
purchasing stocks though overdrafting from the banks, an action prohibited by the
state. It also blamed the securities analysts, consultants, and the media for circulating
overly optimistic rumors and misguiding individual investors.
Party newspapers are well known for their choice of plain and neutral words
and unornamented writing. However, this 1996 article contains words and phrases
that are distinctively negative and emotion-laden, especially when it refers to SOEs.
For instance, the following paragraph on SOEs is fueled with Chinese idioms that are
extremely angry and critical:

First, institutional investors and the Zhuangjia [Big Shots, the House]
manipulate the market. Some Zhuangjia with huge assets take advantage of

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the fact that stock market roars and that retail investors follow the wind [jump
on the bandwagon], taking turns as the Zhuangjia [manipulator] to
manipulate prices. These Zhuangjia are mostly state-owned enterprises, who
rely on their status and connections to summon wind and rain [stir up
trouble], and seek exorbitant profits. They stake a billion pieces of gold on
one throw [throw away money like dirt] without considering any risks, if
succeed, their waist will become loaded with millions of dough [gain
enormous profit], if fail, they will transfer the trouble to the state.

In China’s stock market, one of the most popular terms is Zhuangjia (Big Shots or
the House). This term is used to describe SOEs and other investors who manipulate
the market for personal gains. This term is borrowed from the dealer or house in
gambling games, and also implies the imagery of a landlord in a feudal society.
Zhuangjia are so dominating and ubiquitous that many retail investors base their
investment decisions on guessing the actions of Zhuangjia. State accusations against
the Zhuangjia or SOEs also reflect major changes in the economic and social
relationships within Chinese society. Specifically, official state rhetoric as well as the
introduction of the stock market raised questions about the legitimacy and continued
dominance of SOEs in the future Chinese economy.
Although most Chinese retail investors would agree with the state’s
descriptions and accusations against the SOEs, it was unusual for the Party owned
newspaper to use such language against such established economic actors. The state
appropriated the language of individual investors, such as calling stock manipulators
the House, and describing their activities using vernacular expressions. By assuming
the voice of the individual investors, the state created a sense of identification with
individual investors, helping individual investors to realize that their interests and the

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state’s interests were aligned, and that the state was also a victim of the wrongdoings
of these malicious players. This linguistic creation of identification “induces
cooperation in beings that by nature respond to symbols” (Burke, 1969 [1950]: 43),
and is an explicit example of neo-institutional ideas that suggest that an important
aspect of institutional entrepreneurialism is the social skill or ability to symbolically
“induce cooperation in others” (Fligstein, 1997: 398; 2001: 105).
In adopting the forensic rhetoric of prosecution the state effectively placed
the SOEs into the position of accused and the state into the position of prosecutor.
The state uses this ethos and moral legitimacy to effectively compare and equate the
SOE’s social relationship to retail investors to that of the greedy landlord and
oppressed serfs of feudal society. This argument suggests that this social relationship
is wrong and needs to change.
While the language of prosecution positions the state into the role of
prosecutor, the Chinese citizen is placed into the social position of judge or juror.
Both the prosecutor and the judge are concerned about what happened, what went
wrong, and who is to blame. Assuming the role of the prosecutor, the state acquires
the authority and legitimacy to make arguments that accuse actors of inappropriate
practices. The state appeals to the commonly held social mores in attacking
wrongdoers and malpractices, and thus induces from the audience a sense of moral
legitimacy. In this social context, the contradictions between the communist state and
the capitalist stock market institution are pushed into the background. Identification

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or a shared sense that there is something seriously wrong unites the state as
prosecutor and the citizen as the judge or juror.
At the core of this rhetoric of prosecution is the intention of the state to
normalize the social relationships among market players. As the market developed,
the number and types of participants increased tremendously. In a market that did not
have a clear set of laws and regulations, actors with varying degrees of political
connections and power sought all kinds of loopholes to take advantage of the market.
Certain social identities and relationships and their corresponding practices (e.g.,
rampant speculation and market manipulation) were unfair and harmful to the
development of the market. Therefore, in the 1996 commentary the state
reprimanded many of these market players, new social relationships, and new social
actions, before they became broadly accepted norms or taken for granted
understandings of how China’s stock market would function. Rhetorically, the 1996
commentary reflects the state assuming the role of moral authority in the stock
market. By explicitly referencing or placing into the foreground these social
relationships and criticizing certain past behaviors and practices within these
relationships, the state is suggesting to the Chinese people that it has knowledge of
how these social actors have conducted themselves in the stock market. This
rhetorical move enhances the state’s ethos as a speaker that has knowledge about
what has happened. Moreover, it provides the state the moral legitimacy to set up the
right norms for the market, and establish appropriate relationships among market
players. In short, the state as prosecutor argues for those new social relationships of

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the stock market which are right and worth keeping and which social relationships
are wrong and need of adjustment or abandonment.

The State as Leader or Manager
The Special Guest Commentary published in 1999 came at a time when the
market had been on a continuous downturn for two years. The market took an
upward turn on May 19, 1999, and kept rising for the next 20 days. Whether this turn
indicated a bottom to the bear market or simply a short-term move up before the
continuation of falling prices was on everyone’s mind (Li, 2001). People were
looking anxiously for signs. The publication of the article by the “Special Guest
Commentator” in the People’s Daily on June 15 came at this critical moment. This
article, entitled “Standardizing Stock Market Development with Firmer Confidence,”
states that the recent market rise "reflects the actual condition of the macro-economic
development and the inherent demand of market operations, is a normal, restorative
rise.” More importantly it declared a series of policies that energized the market.
Encouraged by this commentary, the market soared 25% in half a month, and the
market continued its rise for the next two years. Figure 4.3 graphs the moves in stock
market indexes before and after the publication of this article.

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FIGURE 4.3: Movements of Market Returns around the Special Guest
Commentary on Jun. 15, 1999

In contrast to the 1996 commentary’s forensic reasoning, the 1999
commentary is distinguished by deliberative reasoning. Specifically, the commentary
gave specific instructions to some major market players as to what they should do to
improve the market performance. These instructions or guidance were supported by
400
500
600
700
800
4000
5000
6000
7000
8000
-20 -10 0 10 20 30
Shenzhen A-Shares Simple Average Index
Shanghai A-Shares Simple Average Index
Event Date: Relative to 6/15/1999
Shanghai A-Shares

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arguments about the practical benefits of these actions to various market
constituencies.
Securities regulatory agencies should strive to maintain the market principles,
conscientiously improve the standardization of conducting regulatory work.
Reform the share issuance policies, open up the IPO approval process,
enhance the transparency of regulatory work; investigate illegal activities on
the basis of laws, in order to practically protect the interests of investors.

Listed companies should comply with the law in disclosing information, … to
reward investors with better performance.

Further expand the experimentation of securities investment funds, accelerate
the rate of nurturing institutional investors. Fund management companies
should improve operations and management, in order to increase investment
returns.

Implicit in these arguments is the voice of a decision maker who makes rational
judgments about the advantages and disadvantages of particular courses of action
within particular social relationships and situations. It is also a voice that urges the
audience or Chinese people to take actions on the basis of these deliberations. The
use of deliberative reasoning enhances the ethos of the state because the state is
shown to have knowledge about the future outcomes of different courses of action.
Deliberative rhetoric creates identification because it discusses the mutual
consequences of collective actions. This positions the state into the role of manager
or leader and the Chinese citizen in the role of worker or follower. The discourse of
the social relationship of manager and worker resembles and resonates with the form
of rational-legal authority (Weber, 1978). The role of the manager and worker is to
make rational decisions for the benefit of the organization. The manager enjoys the
authority of the decision maker and is regarded as technically competent and skilled

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to make the best decisions for both the managers and the workers. By weighing the
benefits and costs of alternatives and designing plans for action, the manager
acquires pragmatic legitimacy in the eyes of the employees. The deliberative rhetoric
enables the state to highlight its ability to lead the people into a bright future. It
directs the attention of market participants to the practical benefits of these new
market relationships, while simultaneously pushing into the background the
ideological contradictions that may exist between the communist state and its
capitalist practices.
Deliberative rhetoric is perhaps best captured in the public debate made
between 2004 and 2006 regarding non-tradable shares. Non-tradable shares were
state shares or legal-person shares, which were set up as non tradable on the
secondary market. It was a unique feature of China’s stock market and indicated the
initial unwillingness of the state to abandon its ownership of SOEs. However, as the
market developed, most market participants believed that the institutional
arrangement of non-tradable shares was a problem that prevented further
marketization of the stock market. All market participants, including the listed
companies, individual investors, institutional investors, and the regulator, were
engaged in a wide and prolonged discussion about how to make non-tradable shares
tradable. The negotiation revolved around designing ratios to compensate
shareholders of tradable shares (Haveman & Wang, 2008). Although participants at
times were in serious disagreement, what distinguished this debate from previous
debates was that it was fundamentally not about the morality or appropriateness of

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these new market relationships. The questions concerning the appropriateness or
morality of market relationships were pushed into the background, and debates and
discussions revolved around what are the best actions to take within these newly
accepted and legitimate market relationships. This public deliberation of action
within accepted social relationships, as opposed to questioning the existence or
appropriateness of the relationships themselves, reflects that these new social
relationships and identities are relatively clarified, normatively accepted and
established, and potentially on course for a more complete taken for grantedness: the
final stage of legitimation (Green, 2004; Green et al., 2009).

Quantitative Analysis
Coding the rhetoric
Two coders, including the author, read each article in the sample, and coded
the article into one of three categories: epideictic rhetoric; forensic rhetoric; and
deliberative rhetoric. Epideictic rhetoric is coded as discourse that positions the state
as teacher and Chinese citizens as students. This type of rhetoric often explains
concepts in a neutral tone, or reports events (typically a conference on stock market)
without outlining arguments related to morality or future consequences. Forensic
rhetoric is coded as discourse that positions the state as prosecutor and Chinese
citizens as judges. This type of rhetoric is often accusatory describing someone or
something as unjust or guilty. Finally deliberative rhetoric is coded as discourse that
positions the state as leader or manager and the Chinese citizens as followers or

133

workers. This type of rhetoric often proposes concrete strategies and courses of
action. In cases where the articles contained more than one genre of rhetoric, the
coders selected the dominant genre after careful consideration and comparison. The
second coder coded 60 articles randomly selected from the sample. Because the data
are nominal, agreement between the two coders was calculated using Cohen’s kappa
(Cohen, 1960). The inter-coder reliability or Cohen’s kappa is .879 (with p<.00001).
Table 4.1 illustrates selected examples for each genre.

TABLE 4.1: Selected Coding Examples

Epideictic Rhetoric: The State as Educator

Article Title: There Is A Growing Attraction Of the People to Securities Market
Main Arguments: According to experts, securities markets are an indispensible constituent of the
financial market. … Financial professionals commented that securities market has played an
important role in our country’s economic development. (The People’s Daily, 1988_09_04)

Article Title: Exploring A Securities Market With Chinese Characteristics
Building socialism with Chinese characteristics is the main task of the entire Party and all people for
now and for a long time in the future. Against this background, exploring and developing the ways of
our country’s securities market, should reflect the requirement by the main goal of building socialism
with Chinese characteristics. (The People’s Daily, 1991_12_30).

Forensic Rhetoric: The State as Prosecutor

Article Title: Correspondence On The Stock Market
Main Arguments: In the current stock market, there indeed exists this kind of companies that forced
their way through the crowd to the securities market. Some listed companies are illegally occupied by
companies overseas, have hollow profits, false announced assets, and some registered accounting
firms even cook books for them. In these situations, how is it possible to protect the interest of the
public? (The People’s Daily, 1992_09_28)

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Table 4.1, Continued

Article Title: The Buying of Shells Should Not Be Done In a Black Box
Main Arguments: The original purpose of asset restructuring is to make use of the “shell” of listed
companies….The problem is that this kind of asset reallocation should adopt market mechanisms, and
conform to the principles of the securities market – “Open, Just, and Fair.”…Because the buying of
shells has been done through negotiations outside of the market, the whole process is in a black box.
The public investors have no way to know the inside stories, and there existed all kinds of possibilities
of insider trading. …These kinds of related party transactions are absolutely not practices of the fair
market. (The People’s Daily, 1998_07_06)

Article Title: Honesty is Priceless
Main Arguments: In our country’s securities market, honesty is still frequently facing challenges.
Aren’t there many listed companies that make up projects to quanqian [enclose money], and once the
money is enclosed, they “changed their faces” immediately, they either change the target of the capital
investment or entrust money managers with these money. Aren’t there many listed companies that
collude with Zhuangjia [big shots], and manipulate stock prices using insider information? Why don’t
these listed companies stand by honesty and credence? Can’t relevant agencies have some measures
to deal with them? (The People’s Daily, 2001_08_06)

Deliberative Rhetoric: The State as Manager

Article Title: Strengthen Information Service and Perfect The Securities Market
Main Arguments: Now we must establish as quickly as possible a complete set of laws, and economic
and administrative system for protection and monitor, including the necessary system for public
disclosure of information. (The People’s Daily, 1992_07_06)

Article Title: CSRC Stated: Greater Effort Will Be Put Into Removing Controls of The Securities
Market
Main Arguments: The CSRC will talk about cancelling more procedures of administrative approval,
…and delegate the work to other organizations…. The overall principle is to create an environment to
let market mechanisms to play its role, and let the market to function effectively… (The People’s
Daily, 2002_12_07)

Presentation of analysis
The previous analysis examined representative and important examples of
each form of political rhetoric. Moreover, it showed how each form of rhetoric
helped construct the ethos and legitimacy of the state during this period of radical
institutional change. It also showed specific examples of how the state used each
genre of rhetoric to reference, surface, juxtapose, and advocate new social

relationships and identities needed to establish radical institutional change.
analysis uses quantitative met
moved over time. Specifically,
data set of People’s Daily
and explicate the trend and
smaller and more inductive and detailed rhetorical analysis. Figure
number of articles from the
time period 1990 to 2005. The
represents the year.

FIGURE
0
5
10
15
20
1990
1992
Number of Rhetoric Genres
relationships and identities needed to establish radical institutional change.
quantitative methods to analyze how these broader genres of rhetoric
ved over time. Specifically, statistical analysis is applied to the entire longitudinal
People’s Daily news articles. The goal of the next analysis is to confirm
and explicate the trend and sequence of rhetorical genres identified in
smaller and more inductive and detailed rhetorical analysis. Figure 4.4
number of articles from the data set for each of the three rhetorical genres over the
time period 1990 to 2005. The Y-axis indicates the number of articles. The X
FIGURE 4.4: Trends of Rhetorical Genres
1994
1996
1998
2000
2002
2004
Year
135
relationships and identities needed to establish radical institutional change. The next
hods to analyze how these broader genres of rhetoric
entire longitudinal
analysis is to confirm
sequence of rhetorical genres identified in the previous
4.4 shows the
data set for each of the three rhetorical genres over the
axis indicates the number of articles. The X-axis

Forensic
Deliberative
Epideictic

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Figure 4.4 shows that the three genres of rhetoric are used together by the state to
legitimize a new institution. The epideictic genre was used at a relatively high level
throughout the development of the stock market. The forensic genre appears in 1992,
rises steadily to reach its peak in 2001, and declines rapidly after 2001. The
deliberative genre appears in 1992, and continues to rise throughout the years.
To further understand the relative significance between these three genres, I
divided the number of each rhetorical genre per year by all of the articles for that
year. This gives the proportion of each rhetorical genre occurrence relative to all
three genres for that year. Figure 4.5 shows this ratio. The X-axis represents the year
and the Y-axis indicates the ratio of the number of articles of a particular rhetorical
genre out of the total number of articles for that year.
Figure 4.6 graphs the ratio of rhetorical genres from 1991 to 2004 using a
moving average over 3 years to smooth out the curves. Figure 4.6 shows the same
trend that is observe in Figure 4.5.
Figure 4.5 and Figure 4.6 show the change in relative dominance of the
rhetorical genres. Specifically, epideictic rhetoric was employed at relatively high
percentages throughout the years, with an average proportion of 47%. Its dominance
declines steadily. Forensic rhetoric was employed sporadically in early years, grew
to represent an average of 28% between 1996 and 2001, and declined in later years.
Finally, deliberative rhetoric is below 20% in the first five years, rises steadily, and
reaches a dominance of 70% in the last two years. These two graphs reflect that
epideictic rhetoric predominates early in the process and deliberative predominates

late in the process. Forensic rhetoric is most frequently used in the transition period
between epideictic and deliberative rhetoric.

FIGURE 4.5: The Changing Rhetorical Genres of China’s Stock Market from
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1990
1991
1992
1993
Ratio of Rhetorical Genre
late in the process. Forensic rhetoric is most frequently used in the transition period
between epideictic and deliberative rhetoric.
The Changing Rhetorical Genres of China’s Stock Market from
1990 to 2005
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
137
late in the process. Forensic rhetoric is most frequently used in the transition period
The Changing Rhetorical Genres of China’s Stock Market from

Deliberative
Forensic
Epideictic

FIGURE 4.6: A Three Year Moving Average of the Changing Rhetorical

An ordinal logistic regression
changing rhetorical pattern. The dependent variable is the rhetorical genre, which is
coded as 1 for epideictic rhetoric, 2 for forensic rhetoric, and 3 for deliberative
rhetoric. The frequency and percentage of the
category 1, 47 (17.5%) for category 2, and 101 (37.5%) for category 3. The
independent variable is Time, with the year 1991 corresponding to 1, 1992 to 2, etc..
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1991
1992
1993
Ratio of Rhetorical Genre
A Three Year Moving Average of the Changing Rhetorical
Genres from 1991 to 2004
ordinal logistic regression was run to further validate the existence of this
changing rhetorical pattern. The dependent variable is the rhetorical genre, which is
coded as 1 for epideictic rhetoric, 2 for forensic rhetoric, and 3 for deliberative
rhetoric. The frequency and percentage of these categories are: 120 (44.6%) for
category 1, 47 (17.5%) for category 2, and 101 (37.5%) for category 3. The
independent variable is Time, with the year 1991 corresponding to 1, 1992 to 2, etc..
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
138
A Three Year Moving Average of the Changing Rhetorical

o further validate the existence of this
changing rhetorical pattern. The dependent variable is the rhetorical genre, which is
coded as 1 for epideictic rhetoric, 2 for forensic rhetoric, and 3 for deliberative
se categories are: 120 (44.6%) for
category 1, 47 (17.5%) for category 2, and 101 (37.5%) for category 3. The
independent variable is Time, with the year 1991 corresponding to 1, 1992 to 2, etc..
Deliberative
Forensic
Epideictic

139

An ordinal logistic regression is employed because the dependent variable is ordered
from lower to higher categories, and this regression can show if the ordered
categories progress through stages over time. I used STATA 9.0 to estimate the
model. Table 4.2 shows the results.

TABLE 4.2: Ordinal Logistic Regressions of Rhetorical Genre

A significant p-value means that the model is significant. A positive
coefficient for Time indicates that as the variable Time increases, the probability of
rhetoric being allocated to the categories higher in the rank also increases. Put
simply, as time moves on, there is a higher chance that epideictic rhetoric is
introduced in the early period, forensic rhetoric in the middle period, and deliberative

Model
Independent Variable
Time .22***

(.04)
Cut point 1
1.73

(.36)
Cut point 2
2.53

(.38)
Log Likelihood
-257.16
LR Chi-square
39.28****
Df
1
Pseudo R-squared
.07
Number of Observations
268
** p ≤ .01; *** p ≤ .001; **** p ≤ .0001
Standard errors are in parentheses.

140

rhetoric in the last period. The model confirms the trend observed in the graphical
presentation of the movement of rhetorical genres. Time has a significant effect on
the rhetoric employed. As time goes on, there is a progression of rhetoric from
epideictic, to forensic, and finally to deliberative.
This statistical evidence provides important evidence about how radical
institutional change is legitimated. Specifically, in the initial stage of the stock
market development, the state as institutional entrepreneur focused on creating
cognitive legitimacy. At this stage the state used epideictic rhetoric to propose the
use of new social relationships and new definitions of old social relationships. To
maintain its ethos or credibility it created identification through sharing knowledge
and education and thus positioned the state as teacher and the Chinese citizen as
student. Pushing this social relationship into the foreground created a context within
which actors could acquire cognitive legitimacy: comprehension and understanding.
Epideictic rhetoric also created a context for the state to use this ethos to advocate
radical institutional changes to established social relationships and identities such as
communist planned economy relationships as well as introduce new social
relationships and identities belonging to capitalist markets.
At the second stage, the state as institutional entrepreneur adopted forensic
rhetoric to normalize or distinguish which of these new relationships were right and
which of these new relationships were wrong. To maintain its ethos or credibility it
created identification through prosecution of mutual wrongs positing state as
prosecutor and the Chinese citizen as judge or juror. Emphasizing this relationship

141

created a context within which the state could acquire moral legitimacy to assert
what was right and what was wrong.
Finally, when both the cognitive and moral legitimacy are established, the
state as institutional entrepreneur engaged in deliberative rhetoric in order to
optimize actions and behaviors within accepted new market relationships. To
maintain its ethos or credibility it created identification through the calculation of
consequences of collective action positioning the state as leader or manager and the
Chinese citizen as follower or worker. This relationship created a context within
which actors focus on technical competence as well as weigh the advantages and
disadvantages of different courses of action. This field of reasoning provides robust
environment for the production of pragmatic legitimacy.
This specific sequence or rhetorical progression reflects that the institutional
entrepreneurs changed the genre of their rhetoric to adjust to the audience and social
situations as the market evolved. Below I briefly describe the three stages of this
rhetorical progression in more detail. I also offer a few theoretical explanations of
why one might observe sequence of rhetoric during the institutionalization of radical
institutional change for highly embedded actors like the state. Table 4.3 outlines the
changes in these three stages.

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TABLE 4.3: A Rhetorical Model of Ethos Construction and Institutional Change
1
st
Stage 2
nd
Stage 3
rd
Stage
Ethos Ethos Ethos
Educator

Prosecutor

Manager/Leader

Rhetoric Rhetoric Rhetoric

Epideictic
(The rhetoric of
definition/understanding
through praise
and denigration)

Forensic
(The rhetoric of right
and wrong through
attack and defense)

Deliberative
(The rhetoric of
advantage of harm
through urge and
deterrence)

Legitimacy Legitimacy Legitimacy

Cognitive
(comprehension)

Moral
(ethical judgment)

Pragmatic
(self-interested calculation of
benefits and costs)

A Rhetorical Model of Ethos Construction and Institutional Change
This essay argues that the discursive construction of ethos is critical for the
state to legitimate radical institutional change. The three Aristotelian political genres
of rhetoric represent three means by which ethos can be constructed, as well as three
strategies for advocating new relationships and logics within society.
Controversial institutional change challenges the prior ethos of the state.
However, the state may strategically utilize rhetoric to modify its extrinsic ethos and
construct an intrinsic ethos that has the legitimacy and authority to act as an

143

institutional entrepreneur for radical change. The three genres of political rhetoric
represent three common ways through which the self-image of the speaker is
constructed. They also indicate three distinct ways of reasoning about ethos or
identification: definition, comprehension, and understanding for the epideictic,
justice and morality for the forensic, and efficiency for the deliberative. These
different reasoning styles emphasize and foreground particular social relationships
while pushing into the background other social relationships. These different social
relationships help lead to different forms of legitimacy: cognitive, moral, and
pragmatic.
With regards to ethos these genres of rhetoric (i.e., epideictic, forensic,
deliberative) foreground three common identifications or social relationships (i.e.,
educator and student, prosecutor and juror, leader and follower). Moreover, these
three common identifications or social relationships create a context or
predisposition for the production of a particular type of legitimacy (i.e., cognitive,
moral, and pragmatic). With regard to radical institutional change or manipulation of
established logics and social relationships, the three genres of rhetoric often surface,
juxtapose, and rationalize logics, relationships and identities. Epideictic rhetoric
helps to surface, juxtapose, and compare and contrast old relationships and logics
with new relationships and logics. Forensic rhetoric helps to choose which of these
new and old logics are right and wrong and thus normalize and establish the
appropriateness of new institutional relationships and arrangement. Finally,

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deliberative rhetoric helps actors to use and optimize actions and behaviors within
these new and normalized logics and relationships.
The central theme of this essay is that the strategic use of these rhetorical
genres enables the state to legitimate controversial institutional change while still
maintaining its own legitimacy. A specific sequence of change in the rhetorical
reasoning may have facilitated a smooth beginning, a vital middle stage, and an
effective implementation of radical institutional change. At the initial stage the
Chinese government advocated for a radical set of practices that ultimately made it
look delegitimate as a communist regime. The Chinese government solves this
rhetorical and institutional problem by surfacing and juxtaposing taken for granted
lines of reasoning about what socialism, capitalism, and Marxism are. This rhetorical
toggling process legitimates its new policies as well as maintains its legitimacy as the
rightful and legitimate leader of the Chinese people. At the third stage, the new
institutional model has obtained cognitive as well moral legitimacy. The institutional
entrepreneur engages mainly in deliberating on how to make the new institutional
model more efficient and effective. Engaging in deliberative reasoning helps the
institutional entrepreneur establish its status and social position as effective leader-
manager and decision maker.

Stage 1 – Epideictic rhetoric
This model suggests that the institutional entrepreneur initially employs
epideictic rhetoric to define concepts and elevate good models. This rhetoric

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establishes the cognitive legitimacy of the new model in that it helps the public
comprehend what the new model is and how it works. The new model may invoke
institutional logics contradictory to existing logics, but epideictic rhetoric does not
confront the existing institutional logic with accusations. In the beginning years of
the economic reform when the logic of central planning was still very much alive in
both theory and practice, it would have been perhaps unwise for the change agent to
attack the established institutional logic on a moral or pragmatic basis, because it
may have offended people who had taken that logic for granted as well as those
benefiting from current institutional arrangements. Attacks on institutional logics
supported by currently institutional arrangements may threaten people who benefit
from the established institutional structure. In fact, our model may help explain why
many were shocked at the “shock therapy” approach to market reform in Russia,
where the introduction of capitalist practices was met with vehement resistance and a
significant decline in economic output (Lai, 2006). Our model suggests that Russia
may have failed to begin its market reform with epideictic rhetoric and thus establish
cognitive legitimacy. Without the production of cognitive legitimacy and the
emphasis of social relationships less resistant to change, actors remain in
relationships and social identities that will interpret these changes as a threat and thus
mobilize against this change accordingly.
In addition, when a new institutional set of practices like a stock market are
adopted, many new practices are emerging without clearly codified rules and laws.
In such a situation, market participants develop and create several spontaneous

146

solutions and interpretations to their problems and their actions may straddle the
lines of what is legal and illegal. At this stage, it is unwise to employ forensic
rhetoric because it may stifle innovation and adaptation and potentially signify
something as wrong that in the long run may actually prove to be beneficial. Using
forensic rhetoric at the early stage of a new institution may intimidate entrepreneurs
and make them afraid to create and experiment. However, epideictic rhetoric differs
from forensic rhetoric as it uses praise to endorse desirable actions as opposed to
blame to criticize undesirable behavior. It does not place the person or action under
the jurisdiction of law and justice or moral condemnation.

Stage 2 - Forensic rhetoric
At the second stage, the institutional entrepreneur attacks the old institutional
model and defends the new one on the basis of morality or justice. From the social
position of the prosecutor, forensic reasoning establishes the moral legitimacy of the
new institutional logic. It enables the institutional entrepreneur to assume the
language and social position of the prosecutor, thus acquiring the power of
representing justice. Forensic rhetoric may arise in the second stage of institutional
evolution for several reasons. First, as the new institutional logic – the logic of
market economy – is accepted, people become more comfortable with the new order
and thus less resistant to change. In the mean time, a new sense of justice or
appropriateness based on the new logic becomes accepted by the society. The new
logic now has the legitimacy to directly confront the old logic. However the old logic

147

has not completely died out and still provides moral legitimacy for those resistant to
the new change. Hence these two contradictory institutional logics are best embodied
in the forensic rhetoric of prosecution and defense.
In addition, after initial years of experimentation and exploration of
innovative solutions to problems, institutional participants need clarity on what
practices are appropriate and what practices are inappropriate. There is an increasing
pressure to separate what is right from what is wrong, so that the right relationships
and actions can get normalized, standardized, and stabilized and the wrong
relationships and actions penalized and abandoned. By employing forensic rhetoric,
the state as the institutional entrepreneur produces identification by constructing an
image of the state and Chinese citizens as fair, responsible, and moral. By arguing
and advocating for what is right and criticizing that which is wrong, the state also
builds moral legitimacy for new practices. Forensic rhetoric infuses the new
institution with moral value and higher purposes. Forensic rhetoric helps differentiate
between the acceptable and the sanctioned. As actions and rules become normalized,
market participants come to recognize their moral obligations and set up ethical
codes of professional conduct.

Stage 3: Deliberative rhetoric
At the third stage, the new institutional model has obtained cognitive as well
moral legitimacy. The institutional entrepreneur engages mainly in deliberating on
how to make the new institutional model more efficient and effective. Engaging in

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deliberative reasoning helps the institutional entrepreneur establish its status and
social position as effective leader-manager and decision maker. In the third stage,
market participants have overcome the cognitive barrier, and formed a unified moral
sentiment on the fundamental principles of the stock market. This is when
deliberations about the advantage and disadvantage of particular courses of action
dominate people’s attention. As mentioned above, in the epideictic stage, the most
urgent task is to understand and learn so that correct models and social relationships
are adopted; in the forensic stage, the most pending question is how to create a
shared moral sentiment for which relationships are right or wrong and what are
appropriate actions within these relationships. It is only in the last stage of
development that people are essentially devoted to deliberation over pragmatic
concerns, because actors have reached agreement, relative consensus, and moderate
acceptance of the new logics and new relationships that govern the field. The key
concern faced by actors now is how to coordinate and work within these new social-
market relations in order to optimize the benefit and value of collective actions and
behaviors.
The use of deliberative rhetoric helps actors reach consensus on executable
plans, and also enhances the legitimacy of the institutional entrepreneur. By
articulating the reasons and justifications for actions, the state as the institutional
entrepreneur produces identification by emphasizing the state’s technical
competence, rational decision making, and the benefits to the Chinese citizens of
engaging in collective and coordinated actions within these new social relationships.

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The ethos that emerges in deliberative rhetoric is characterized by the ability to put
ideas into practice. With this practical orientation, the state builds the pragmatic
legitimacy of the new institution. Deliberations crystallize ideas, values, and norms
into concrete plans; this process involves the codification of practices into
procedures, rules, and policies. The state formally adopts these rules and policies as
action plans.
Taken as whole, this rhetorical sequence potentially reveals important
ideational dynamics of meaning construction, institutional change, and the evolution
of culture.

DISCUSSION
Rhetoric and State Influence and Power
While the neo-institutional literature has largely presented the state as an
institution that coercively constrains or limits actions, our analysis of China’s
Communist Party’s rhetoric on the stock market emphasizes the importance of the
rhetorical or persuasive aspects of state power. In this conception, the rules and
regulations by which rulers gain power are not merely organizational and political,
but rhetorical. Power is seen as more than the manipulation of coercive force,
economic resources, or the authority of established positions and relations of power;
it is also conceptualized as the purposeful use of symbols to construct images,
identities, and rationalities. Although states are authorized to utilize force without
giving justifications, states rarely do that. Instead, states often use persuasion to

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legitimate current social positions as well as construct new ones. Without the use of
persuasion, the state risks losing institutionally legitimate authority (Zucker, 1987:
444).
Whereas material force is explicitly coercive, the power of rhetorical
persuasion and identification is often latent and unobtrusive, for its influence is
predicated on the ability of rhetoric to shape beliefs and create shared understanding
and meanings (Hardy, 1985; Hardy & Phillips, 1999; Hensmans, 2003). Scholars
have often emphasized how rhetoric employed by the state frames problems, defines
appropriate responses, limits conceivable alternatives, and channels collective
actions (Lukes, 1974; Perrow, 1986); however, our unique insight is that rhetoric is
also used to frame ourselves as well as our relationships to each other.
The rhetorical conception of state power resonates with political theorists’
articulation of a third dimension of power: the means through which power
influences, shapes, and determines conceptions of the necessities, possibilities, and
strategies of challenges in situations of latent conflicts (Lukes, 1974). This third
dimension of power emphasizes the discursive and symbolic interventions used to
alter rationales for relationships and social actions (Althusser, 1969; Foucault, 1995;
Gramsci, 1991; Lukes, 1974). Such power is embodied not through actual or covert
conflict, but the very use of power is to “prevent such conflict from arising in the
first place” (Lukes, 1974: 23).

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Institutionally Embedded Agency
This essay contributes to the literature on institutionally embedded agency by
highlighting the agency of the state in initiating and institutionalizing change.
Coercive conceptions of the state tend to see the state as reactionary, reluctant to
change, and often as a limiting or constraining force on institutional actors.
Empirical research in the neo-institutional literature rarely studies the agency of the
state. In fact, most literature on institutional agency or entrepreneurship has focused
on professions, elite social groups, or missionary organizations in championing a
new institution (DiMaggio, 1988; Greenwood, Suddaby, & Hinings, 2002; Rao,
1998). Furthermore, many studies have shown that institutional entrepreneurs are
typically actors who are at the periphery of an organizational field or intersection of
different organizational fields (Garud, Jain, & Kumaraswamy, 2002; Haveman &
Rao, 1997; Leblebici et al., 1991; Rao et al., 2000). The assumption is that actors
who are at the margin of a given field and are of lower status are less embedded and
bounded by the institutionalized rules, and thus are more likely to see and act on new
opportunities.
2
This case analysis directly explores and addresses the question of
institutionally embedded agency: how can an actor change an institution, if that
actor’s very thoughts, interests, and relationships are embedded and shaped by that
institution (Hardy & Maguire, 2008: 198-199; Holm, 1995: 398)? It begins to shed

2
Two studies we know of that portray the state as the institutional entrepreneur are Fligstein and
Mara-Drita’s (1996) study on the role of states in the formation of the European Union and Child, Lu,
and Tsai’s (2007) study on the role of China’s state in the development of China’s Environmental
Protection System. Our focus differs from the first study in that the state in our study acted as the
institutional entrepreneur in a top-down institutional change, not constructing a higher-order
institution. Our study differs from the second research in that we focus on the legitimation of a set of
radical and controversial institutional practices.

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light on this question by examining how the state as a highly embedded actor can
advocate and implement radical institutional change that contradicts its legitimate
authority without using coercive force.
To legitimate a capitalist institution in a communist regime threatens the
ideological and legitimate authority of the Communist Party in China and poses a
unique rhetorical conundrum. Examining the rhetoric of the state enable scholars to
understand how it is possible that an institutional actor creates and legitimates an
innovation that contradicts its own deeply ingrained beliefs and principles and
embedded relationships. The insight is that the agency of the state lies in its ability to
transform its own ethos as well as important social relationships in society though
language. The discursive construction of the state’s ethos in turn provides the state
with a reinvigorated authority and legitimacy to justify changing fundamental
institutional arrangements and relationships in society.
Previous research suggests that the most central and powerful social actors of
an organizational field can become the change agent because their very
embeddedness and privilege allow them to recognize institutional constraints and to
see field-level institutional inconsistencies and contradictions (Fligstein & Mara-
Drita, 1996; Greenwood & Suddaby, 2006). China’s Communist Party occupies such
a position. But such a structural position does not automatically lead to the ability to
initiate or successfully implement change (Hardy & Maguire, 2008: 199), especially
if and when these inconsistencies and contradictions raise questions about the
authority of that powerful social actor. Moreover, robust explanations of agency

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must go beyond just explaining the conditions and context for agency and begin to
explicitly detail and show how actors use social skills to recognize, share, and
convince other actors these inconsistencies and contradictions exist and that viable
alternative courses of action are available and need of implementation (Hardy &
Maguire, 2008: 199). This essay stresses that the strategic agency of China’s state
lies in its skillful deployment of rhetoric in constructing its trustworthiness and
credibility as a change agent, as well as convincing Chinese society to implement
radical changes to current institutional arrangements. This rhetorical construction of
ethos and social relationships is critical for the incumbent to legitimate radical
change that may potentially delegitimizes its identity and authority.

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CHAPTER 5: CONTROVERSY: MANAGING PRESUMPTIONS

This study examines how controversies in the public sphere relate to elite-led
institutional transformation. Specifically, this study is motivated by the fact that the
Chinese leadership has faced many contentious debates and controversies in the
process of introducing the stock market into the socialist country. Some
controversies are quickly solved, others are kept alive for a long time, and still others
are transformed and keep coming back. Controversies create huge volatilities in the
market, affect policy orientations, and attract nation-wide attention and
argumentative participation.
Despite the prevalence of controversies, there is little study on controversy in
organizational research. A primary reason is that there exists a negative bias toward
concepts such as controversy, conflict, or resistance. As the rhetorical theorist
Goodnight notes, controversy has been subsumed under the rubric of conflict – a
behavioral problem waiting adjustment, an organizational failure in need of
“appropriate intervention and resolution,” or a systemic error waiting for corrections
(Goodnight, 1991: 4). The organizational scholar Ford has put forth a similar
criticism noting the fact that organizational researchers generally consider resistance
and dissent as irrational and dysfunctional responses to organizational change (Ford,
Ford, & D'Amelio, 2008: 362). These views treat controversies, conflict, or
resistance as structurally predetermined as opposed to unfolding agentic process.

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Consequently, scholars tend to ignore the potentially positive influence of conflicts
and controversies on organizational and institutional change.
A body of literature in argumentation theory suggests a new, positive view of
controversy. It suggests that controversy can be “an achievement of sustained and
mindful opposition,” which can be “taken as a strong sign that reason and
communication are in ferment” (Goodnight, 1991: 6). Drawing from this stream of
literature, this study examines the role of controversy in institutional change.
Specifically, I investigate major controversies that accompanied the development of
China’s stock market, in an attempt to understand where the controversies originated,
what effect these controversies had on institutional change, and whether and in what
ways the controversies were manageable.
To answer these questions, this study develops a model for understanding
controversy and institutional change. This model is based on studying public
controversies surrounding the Chinese stock market during the history of its
development. Through an in-depth analysis of the context in which controversies
arise, the topic of each controversy and opposing arguments, and the responses by
Chinese leaders, this study suggests that (1), controversies arise within a context
where tensions between conflicting dominant political trajectories call for
argumentative engagements; and (2), leaders can steer policies skillfully through
maneuvering responses to controversies, thus shifting the burden of proof between
the opposing sides, and shaping presumptions. A presumption defines a taken for
granted premise, a rule that should guide judgment in a particular case. The

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maneuvering to create presumptions reflects and affects the policy choices of leaders,
which then determine the trajectory of institutional change.
This study makes a number of contributions. First, as an in-depth empirical
study of controversies accompanying China’s adoption and development of the stock
market, it adds to understanding of an important yet often ignored phenomenon.
Second, this work extends rhetorical institutional theorizing (Suddaby & Greenwood,
2005) by exploring the evolving conditions of debates. Third, my analysis enhances
understanding of the effect of debates on the trajectory of institutional change.
Specifically, the topics that controversies deal with are sites where institutional
logics are contested, and as a result, presumptions in the Chinese society about the
market-based reform are shifted. Finally, this study has implications for strategic
leadership in guiding and managing controversies in change process.

THEORETICAL DEVELOPMENT
This study rests on the theoretical observation that controversies can lead to
institutional change because controversies disrupt taken-for-granted reasoning.
However, institutional theory lacks constructs adequate to conceptualize how
controversies arise and how they shape the trajectory of institutional change.
Drawing from rhetorical studies of controversy, and building on the idea of dominant
political thought and the concept of presumption in disputes, this study proposes a
model for understanding controversies in institutional change.

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Controversies and Institutional Change
Despite the prevalence of controversies in society, few studies have explicitly
addressed the question of how controversies relate to institutional change. Goodnight
has explored this question in a series of essays that provide the ground for this stream
of research. He defines a controversy as “a site where the taken-for-granted
relationships between communication and reasoning are open to change,
reevaluation, and development by argumentative engagement” (Goodnight, 1991: 5).
A controversy is likely to subvert established communication strategies and generate
new ones by expanding “cultural, social, historical, and intellectual arguments”
(Goodnight, 1991: 2). Since controversies involve making new and unorthodox
arguments, they have the potential to de-institutionalize ossified beliefs and thus
create conditions for institutional change. The existence of controversy, therefore, “is
not a sign of a sick society or a demos incapable of action but, instead, often is a sign
of a public capable of evolution, changing in response to shifting beliefs, norms, and
conditions” (Fritch, Palczewski, Farrell, & Short, 2006).
Based on this perspective, controversy is a key mechanism of institutional
change because oppositional arguments disrupt uncontested beliefs and values, and
unsettle taken-for-granted social norms and conventions (Olson & Goodnight, 1994).
The outcome of oppositional argument is often neither agreement nor
incommensurable fragmentation of positions. Agreement is hard to achieve since the
issues contested often inscribe fundamentally conflicting interests

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(Olson & Goodnight, 1994), yet the debate may have positive effect on the public
sphere by fostering new forms of resistance (Olson & Goodnight, 1994).
Scholars of organizational theory have regarded debates and controversies as
part of the theorization stage that problematizes the situation and justifies a solution
(Greenwood et al., 2002; Tolbert & Zucker, 1996). For endogenous institutional
change, conflicts in institutional logics are the source of change that lies within an
institutional field, and “rhetoric can be used to expose and manipulate dominant and
subordinate institutional logics and create the impetus for institutional change
(Suddaby & Greenwood, 2005). Disagreements, disputes, and public controversies
are therefore conceptualized as inherent in the process of institutional change. Yet
there is little research on how disputes and controversies are played out in the
ongoing process of theorization. The question of why some calls for change succeed
and others fail remains in a black box.

A Model of Institutional Change Embedded in Controversies
Building on the theoretical insight that controversies are conducive to
institutional change, it is possible to develop a model for understanding how
controversies shape the trajectory of policy choices. Figure 5.1 outlines the model.
Specifically, t0 indicates the time for the beginning conditions, policies, and ideas.
At t1, oppositional arguments form a controversy, which may induce response from
leaders. Arguments from opposing sides strive to affect the presumption at t2, and
leaders’ response may change the formulation of new presumptions. A controversy

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will also leave some conflicts unresolved. The newly obtained presumptions and
unresolved conflicts then form the conditions, policies, and ideas at t3.

Figure 5.1: Controversies and Institutional Change
t0-Political Climate t1-Controversy t2-Presumptions

t3-Political Climate

Dominant political climate
Controversies do not occur in a vacuum. Rather, they take place in the
context of social and political expectations. Different social and political points of
view prescribe different worldviews and predict different types of human conduct. In
the case of American political philosophy, liberalism and conservatism have been the
dominant forms of ideology. Goodnight outlines two separate sets of premises that
underlie the liberal and the conservative political philosophies (Goodnight, 1980).
Specifically, Goodnight notes that American liberalism rests on a consistent set of
premises that assumes change is inevitable, and actions that foster change are
prudent. The liberal conception of human nature is that human nature is susceptible
to improvement; the liberal conception of the law is that laws lag behind the progress
Conditions
Policies
Ideas
Oppositional Arguments
Presumption
Leader’s Response
Unresolved
Conflicts

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of the society and need updating; the liberal conception of knowledge is “knowledge
is ever widening, better and more relevant now than in the past (Goodnight, 1980).”
Given these conceptions, the liberal sees more risk in perpetuating a stagnant
institution and less risk in using government to implement policies for the good of
the whole. In contrast, American conservatism favors “adherence to the old and tried
against the new and untried.” For American conservatives, change is “neither
inevitable nor portentous of good,” and actions that foster preservation are prudent.
The conservative conception of human nature is that the great majority is concerned
with short-term personal benefit and that the altruistic citizen is an exception; the
conservative conception of law is that the law was created by good men and a
necessary restraint of power; the conservative conception of knowledge venerates
traditional wisdom. Because of these views, the conservative sees more risk in
abolishing self-restraint to elevate change in the name of the common good and
abstract values (Goodnight, 1980).
In China, liberal and conservative political philosophies are confounded by
China’s modern experience in leftist movements, which has become a tradition of
revolution. But similar to America, actions in China’s transformation can be traced
to premises stemming from political philosophies.

Presumption
A basic element in a dispute or public controversy is which side has the
presumption and which side has the burden of proof (Goodnight, 1980). Presumption

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is the counterpart to the concept of burden of proof, and is defined as “a
preoccupation of the ground… [that] implies that it must stand good [until] some
sufficient reason is adduced against it (Whately, 1963). In the Anglo-American
jurisprudential system, the defendant is presumed innocent until proven guilty; the
defendant enjoys the presumption and the prosecution has the burden of proof. This
assignment of presumption is a rule that expresses a just relation between the state
and the citizen (Goodnight, 1980).
Conventionally, scholars have assumed that the status quo or existing
institutions are a source of presumption (Whately, 1963). In addition, scholars
suggest that the side that has the presumption has the strategic advantage to bring
about a “triumphant defense” of one’s position (Whately, 1963). Outside the law,
however, the determination of which side has the presumption and which side should
shoulder the burden of proof is subject to manipulation and never fully pre-fixed
(Goodnight, 1980; Liu, 1997; Whately, 1963). For example, Einhorn (1990)
demonstrates how advocates of radical change who do not enjoy presumption can
discharge their burden of proof and seize the “ground” of presumption through
rhetorical strategies (Einhorn, 1990). Goodnight (1980) discusses the concept of
presumption in relation to public controversy. He conceptualizes presumption as
“that tension between the premature denial of new knowledge, falsely retaining old
knowledge, on the one hand, and premature acceptance of new knowledge falsely
denying old knowledge on the other.” This conception of presumption treats
presumption as a risk that different political philosophies calculate in different ways.

162

As a result, presumption cannot be simply assigned to the defensive side or those
adhering to existing institutions. Rather, presumption gets assigned as those engaged
in the argumentation process realizes their particular risks and decide to take on the
responsibility or burden of proof. Goodnight summarizes, “In any dispute there is no
necessary single ‘ground’ but always a struggle to establish symbolic territory or
positions on which resolutions may be evaluated. Consequently a debate may serve
to order competing presumptions which are more or less uncertain because no single
party in the dispute owns the territory. Thus a debate may serve not only to decide
what should be done, but it may also serve to distinguish exactly what is the present
system extending into the future and what would constitute deviation (Goodnight,
1980).”

The Authority as the moderator of public controversy
In any controversy there is the aggressor and the defendant. The aggressor
may call for a change, or for a reconfirmation of existing institutions. The defendant
would defend the status quo in the first instance, and defend a change in the second
scenario. Which side has the initial presumption depends on which side’s political
philosophy is the dominant political thought at the time of the controversy. As the
aggressor and defendant engage in the argumentation process, the side that has initial
presumption may lose it in the rhetorical exchange. Similarly, the side that has
presumption against it may regain it through the deployment of rhetorical strategies.

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However, presumption is constituted not only by opponents in a dispute, the
construction process also involves the role of judges (Goodnight, 1980). Judges are
typically authoritative agencies. They can participate in the controversy by passing
laws and regulations, or they can proffer their own arguments in the mist of
oppositional arguments. The position that judges take shapes the direction in which
presumption moves along the array of political thoughts, and ultimately determines
the policy choices among alternatives proposed by advocates from opposing sides of
the controversy. In U.S. judges are regulators, private elites and citizens. In China
judges are political authorities whose authority rests on a combination of official
positions and discursive invention. Authority intervention in a controversy can be
strategic. As Goodnight notes, “[A] knowledge of how to manipulate presumption
can be very powerful. Sometimes it may stifle productive debate, at other times it
may forestall more esoteric objections (Goodnight, 1980).”
It is important to note that the involvement of authority in public controversy
does not necessarily bring about determinacy and closure, silence opposition, or
quell doubt. In fact, “authority is never monolithic and invention takes place
precisely where rhetorical authorities conflict or at least have yet to agree (Liu,
1997).” Positions taken by authoritative judges in one controversy may be revisited
and revised in another controversy.
This model of institutional change outlines the key players and processes
leading to the policy outcome. Specifically, different political thought encodes
different set of rules for argument about human nature, change, law, and knowledge.

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When a particular political philosophy dominates a society or community, it shapes
the kind of risks that a society or community takes as acceptable and routine and the
kind of risks that is avoided (Goodnight, 1980). Arguers who hold different political
philosophies can act as the aggressor and defendant who put forth oppositional
arguments to create a controversy. As the argumentation process unfolds, both sides
can employ rhetorical strategies to take on or discharge the burden of proof. The
outcome of a controversy does not depend solely on the soundness of arguments.
There are instances where arguments and counterarguments are of equal strength and
neither side can come up with reasons to break the deadlock. The unavailability of
compelling arguments one way or another makes it possible for a third party or
authoritative actors to participate in the argument and shape the outcome of the
debate through combining the authoritative position of the actor with a soundly
justified policy decision. This argumentation interaction among aggressors,
defendants, and authoritative actors move the presumption of a society or community
from its standing before the controversy to a new standing. This new presumption
accepted by the society or community affects policy choices of the leadership.

METHODS
The history of the development of the stock market in China is replete with
public controversies from its very beginning until this day. This makes it a natural
site for studying controversy and institutional change as an ongoing process. It is not
possible to discuss every controversy surrounding the stock market. Instead, this

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essay focuses on three of the most consequential controversies. The selection of
these three controversies is based on a survey of history, interviews with
knowledgeable individuals and the result of a sustained search in a Chinese
publication database. First, detailed historical accounts of the development of the
stock market provide a comprehensive list of public controversies. I distilled three
controversies that are both significant in magnitude and reflective of critical shifts in
political thought. Second, I interviewed four Chinese economists who specialize in
China’s stock market research, working in Chinese universities or research
institutions. Chinese economists have been very visible in the public sphere by
engaging in intensive debates and making controversial commentaries on
mainstream media, which generally attracts the attention of a significant portion of
the society. They are protagonists in the three controversies discussed in this essay.
Conversations with economists provided me with an understanding how economists
viewed these key figures in the controversies. Their insights corroborated and
enriched my analysis.
Finally, I searched China Academic Journals Full-text Database (CAJ) for
articles related to these controversies. CAJ is the most comprehensive, full-text
database of Chinese journals in the world. It contains 8,460 titles of academic
journals, of which 803 titles belong to the category “Economy and Management.” I
used key words to search articles related to the three controversies in the “Economy
and Management” field. To collect articles for the first controversy (“surname”
controversy), I used the key phrase xingshexingze ( 姓社姓资) to conduct a search for

articles with that phrase in the abstract.
(“casino” controversy)
articles with that phrase in the abstract. To collect articles for the third controversy
(“MBO” controversy), I searched articles that contain both the names of
Xianping ( 朗咸平) and
Zhang Weiying ( 张维迎
resulted from these searches. Figure 5.
Together, these three sources provide the material for the analysis.

Figure 5.
0
5
10
15
20
25
30
35
40
45
Number of Articles
articles with that phrase in the abstract. To collect articles for the second controversy
(“casino” controversy), I used the key phrase gushiduchang ( 股市赌场
articles with that phrase in the abstract. To collect articles for the third controversy
, I searched articles that contain both the names of
and Gu Chujun ( 顾雏军) or both Lang Xianping (
张维迎) in the full text. Figure 5.1 graphs the numbers of articles
resulted from these searches. Figure 5.2 shows the rise and fall of these controversies.
ogether, these three sources provide the material for the analysis.
e 5.2: The Rise and Fall of Three Controversies
MBO
Year
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articles for the second controversy
股市赌场) to search for
articles with that phrase in the abstract. To collect articles for the third controversy
, I searched articles that contain both the names of Lang
( 朗咸平) and
) in the full text. Figure 5.1 graphs the numbers of articles
shows the rise and fall of these controversies.
ll of Three Controversies

MBO
MBO
Casino
Surname

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ANALYSIS
In this section, I first sketch the political thoughts that have dominated the
Chinese intellectual and political scene during the reform era. Then I discuss the
three controversies, outlining oppositional arguments, explaining leader response,
and assessing the policy outcome resulting from the controversy.

Political Philosophies during the Reform Era
Contemporary Chinese political philosophies can be traced to the May 4
th

Movement in China in 1915-1919. The May 4
th
Movement is regarded as the
Chinese Enlightenment movement, representing a profound break with China’s
imperial past. The slogan of the May 4
th
movement is “Mr. Science” and “Mr.
Democracy.” Chinese intellectuals at the time were reflecting deeply on the fact that
China’s imperial power had been long lost and the whole country had become so
weak that it was semi-colonized by Western powers. A dominant attitude at the time
was that the only way to save China was to abandon Chinese traditional philosophies
which had severely impeded China’s modernization, and to use “New Culture, New
Morality” to rebuild China. Many Western ideas were introduced into China.
Communist thought was also introduced in connection with the Russian communist
revolution in 1917. Communism appealed to Chinese intellectuals as a new vision
for the rebirth of the nation.
Although the vision of the May 4
th
movement and that of the communist
regime established in 1949 are not perfectly aligned, the CCP have enshrined the

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May 4
th
movement as an enlightenment cultural movement which opened up the
space for the introduction of Marxist thought. The CCP in the pre-reform era had
carried out the May 4
th
legacy which advocated new culture and new morality and
renounced traditional Chinese culture and morality.
Communist China has been a one-party rule, authoritarian regime. However,
the CCP has never been a monolithic authority. Factions within the Party reflect
different interpretation of Marxism, visions for the Party, and conceptions of political
agenda. Moreover, these factions are in constant process of realignment. During the
reform era, there were three kinds of political movements that significantly shaped
the sphere of public discussion. They were the Old Left, the liberals, and the New
Left. These labels are used by Chinese and do not necessarily correspond to Western
equivalents. Roughly speaking, the Old Left was most dominant in the Deng
Xiaoping regime (1978-1992), the liberal outlook was most prevalent in the Jiang
Zeming-Zhu Rongji regime (1991-2002), and the New Left became powerful in the
Hu Jintao-Wen Jiabao regime (2002-present).

The Old Left
The Chinese Old Left is characterized by commitment to the tradition of the
Chinese communist revolution and faithfulness to the orthodox theories of Marx,
Engels, Lenin, Stalin, and Mao. In Deng’s era, the Old Left was a predominant
political thought that had its guardians in the majority of the “Eight Party Elders” –
founding fathers of the communist regime who were retired or semi-retired from the

169

politburo but still possessed significant power in determining policies in the 1980s
and early 1990s. In contrast to America, where conservatism is the political right, the
Old Left occupies the contemporary space of the Chinese conservative. Similar to
America, where conservatism is considered the defender of the status quo, the
Chinese Old Left defended the Chinese socialist status quo which gave strong
presumption to central planning and to a command economy led by the CCP. The
position of the Old Left was weakened by the country’s move toward a market
direction and they grudgingly accepted some degree of market forces in the 1980s
and 1990s. The Old Left sees the market as the foundation of capitalism and is
always on the alert that China would be “peacefully transformed” into a capitalist
society because of the adoption of markets. The Old Left upholds the ideal of
communism and takes great pride in the communist elimination of exploitation. The
nightmare of the Old Left is the collapse of the communist regime, which would
mean not only the loss of controlling power for the CCP, but also the abandonment
of its ideal and vision for China. Although Party Elders passed away during the
1980s and 1990s, the Old Left remains a dominant party and ideological force
underlying many of the policy debates in the 1990s.

The liberals
Chinese liberalism has its indigenous roots in the May 4
th
movement, whose
proponents advocated individual freedom and rationality. During the pre-reform era,
the part of the May 4
th
movement that emphasized political democracy and personal

170

liberty was suppressed and often criticized as “capitalist”. During the early years of
the reform, particularly the 1980s, there was revival of liberal thought, which saw
unprecedented exaltation of personal freedom and openness to Western liberal
political philosophy.
Similar to American liberalism, the Chinese liberals welcome change. For
them, the socialist planning system is not working, and introducing markets into the
system is the best solution. For Chinese liberals, moving away from the central
planning system represents a step toward greater freedom and a better society for all.
The liberals see the Old Left as dogmatic in its defense of communist ideology. By
contrast, the liberals tend to offer a new interpretation of Marxism to keep pace with
reform actions, arguing that China’s reform is consistent with and contributes to the
development of Marxist thought.
Within the domain of Chinese liberalism, there is a broad range of positions
with regard to the pace and methods of reform. Between 1978 and 1989, some
advocates took a moderate position, which focused on economic reform and
refrained from political reform; others took a more radical position, which pushed for
change on both political and economic fronts. The period between 1989 and 1991
was a time of retraction, when the more radical liberalism was repelled and receded
from the official agenda of the CCP. The modest reformist position emerged as the
overarching orientation from 1992 to 2002, where Jiang Zemin was the Chief
Secretary of the Party responsible for steering the Party’s ideology and Zhu Rongji
was the primary person behind the economic reform. The liberal Jiang-Zhu regime

171

embarked on the adoption and development of the stock market, restructuring of
SOEs, and many other reform measures that fostered the development of the private
sector and the competitiveness of Chinese firms. A famous slogan by Jiang Zemin,
“keep up with the times,” best captured the liberal presumption of the CCP. This
phrase was first coined by a prominent scholar in late Qing dynasty. The meaning of
this phrase is to emphasize that a person or a country should change so that it can
meet the new challenges posed by the new times. In a speech given in July 1
st
, 2001,
the 80
th
birthday of the CCP, Jiang Zemin linked this phrase with Marxism, he said,
“Marxism has the theoretical quality of keeping up with the times.” Jiang used this
phrase to educate Party members that the CCP needed to emancipate minds and
continue to innovate by gauging the changing conditions and learning from new
experiences. Jiang also created a theory called the “Three Represents.” It says that
the Party represents: (1) the demands for the development of advanced production
forces; (2) the forward direction of advanced culture; and (3) the fundamental
interests of the great majority of the Chinese people. The first of these “Three
Represents” was the most radical. It should be noted that in the ideological
movements in the pre-reform era, including the “Socialist Education Movement” (or
the “Four Clean” movement”) in 1963-1965, and the Cultural Revolution in 1966-
1976, the target of the movement was the “capitalist roaders” who were in power
within the CCP, the administration, and the military. The charge was that these
capitalist roaders regarded “production forces” as the key to progress. It was not
surprising that Deng Xiaoping, who was labeled the biggest capitalist roader within

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the CCP during the Cultural Revolution, invoked “production force” when he gained
the power to start the reform. Deng had a theory of “Three Benefits,” in which he
argued that whatever practices that benefit the advancement of production forces
should be adopted by the reform. Jiang Zemin’s theory represents a significant
extension of Deng’s idea. Jiang essentially argued that those who advance
production forces should be part of the CCP. Based on this theoretical innovation,
private entrepreneurs are regarded as exemplary of the “advanced production forces,”
thus are encouraged to become members of the Party.

The New Left
The Chinese New Left has developed in reaction to the liberal policy during
the Jiang-Zhu regime. China became richer as a result of the market-oriented reform.
However, serious problems ensued. Because the policies of the Jiang-Zhu regime
favored the development of the cities at the expense of the rural area, and favored the
development of SOEs at the expense of private enterprises, the condition of peasants
deteriorated and the gap between urban and rural areas increased dramatically. The
imbalance of growth fostered corruption and the manipulation of markets by
powerful interest groups.
The Chinese New Left borrows its name from the New Left in the West, and
draws from the Western New Left as its theoretical foundation. The New Left
concerns itself with the dire condition of peasants in the rural areas, workers’ rights
during the massive restructuring of SOES which has driven workers out of work, and

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the condition of millions of peasant workers who are crudely exploited as laborers in
the cities. The New Left lays blame on the reform policies for creating these
impoverished social groups, and questions the direction of the reform.
The Chinese New Left and the Chinese liberals engaged in an intensive
intellectual crossfire during the late Jiang-Zhu regime. Since the liberal ideology
dominated the orientation of economic policies during the Jiang-Zhu regime, the
New Left economists were not given much voice in the media (Zhao, 2008: 288).
However, the Hu Jintao-Wen Jiabao regime has made significant changes to the
policy orientation of the Jiang-Zhu regime. They put forth slogans like “putting
people first,” acknowledging that they care about the social groups that are powerless
and left behind by the reform. Hu Jintao launched a theory called the “Scientific
Outlook on Development” in the 17
th
Party Congress in 2007. The Scientific
Outlook on Development emphasizes comprehensive, balanced and sustainable
development. Hu’s emphasis on “putting people first” and balanced and sustainable
development represents a correction of the policies of the Jiang-Zhu regime which
had resulted in serious environmental deterioration and social problems.
The Chinese liberals have been labeled the political right. They are on the
“right” in the sense that they advocate free market and less government intervention,
but they are on the side of change, which makes them closer to the political left in
the American conception of liberal philosophy. The true conservatives in China are
the Old Leftists, but the Old Left became conservative only in relation to the market-
based reform. They were the revolutionaries in an earlier period of history when

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China ended its imperialist tradition and was caught in a world of colonial logic,
world wars, and domestic political struggle. It appears that all dominant Chinese
political thought in modern times heavily orients toward the presumption of change.
Although the CCP took new positions in the reform era, the CCP has constantly
revised its core thoughts and ideas.
Next I turn to the three controversies surrounding the development of China’s
stock market, analyzing how dominant political thought underwrote the controversy,
and how the response by the CCP leadership shaped the presumption of the Chinese
society, which in turn, affected policy choices of the Party.

First Controversy: Is the Nature of the Stock Market Socialist or Capitalist?
Background and political thought
When the Shanghai and Shenzhen stock markets were officially opened in
late 1990 and early 1991, the Old Left was the prevailing thought in the political
climate. It was a period of retraction after the Tiananmen incident, which embodied
the nightmare of the Old Left. The language of reform was replaced by a re-emphasis
on the elimination of exploitation and nationalist sentiments. Previous policies that
benefited private entrepreneurship were suppressed and, as a result, private
enterprises shrunk quickly.
Before the formal opening of the stock market, informal, over-the-counter, or
even black markets had been active since the mid 1980s. The liberal policies of the
1980s fuelled the development of Township and Village Enterprises (TVEs). These

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TVEs were typically collectively owned. According to the regulation issued by the
state council in 1991(State Council, 1991), collectively owned enterprises are also
considered owned by the people. But collectively owned enterprises are owned by
the people that are contained geographically (in towns and villages) or within the
boundaries of the company. In many cases, collectively owned companies are owned
partly by local governments. They can also consist of a group of individuals, or as a
combination of governments, individual entrepreneurs, and foreign investors.
Collectively owned companies are typically smaller in size than large state-owned
enterprises (SOEs), and many are controlled by local governments. These companies
did not generally enjoy the benefits of SOEs whose managers still had easier access
to bank loans. Since it is hard for collectively owned companies to get insured bank
loans, and also because they can retain their profits, managers of collectively owned
companies were willing to take the risk of seeking capital by issuing shares (Green,
2003). Records show that the public issuing of shares by companies took place as
early as the year 1980 (Li, 2001). By 1989, up to 10,000 companies had issued
shares (Economist, 1989). Share issuance received support from local governments.
As part of market reform, local governments took over control and cash flow rights
of the vast majority of small- and medium-sized SOEs in the early 1980s, and sought
more aggressively sources of investment capital other than fiscal grants and bank
loans (Xia, Lin, & Grub, 1992). Local governments, especially Shanghai and
Shenzhen, became experimental sites for shareholding companies and the public
share issuances.

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This idea of raising money from individuals originated in the rural sectors.
Since 1979 the central government had consented to the formation of joint stock
enterprises by collective production units, the dominant organizational system in
China’s countryside. These joint stock enterprises in towns and villages absorbed
funds from collectives and individuals and provided profit sharing through
dividends. The fast diffusion and success of these joint stock cooperative
organizations in several provinces inspired liberal-minded government officials and
economists to help persuade the central government to extend the shareholding
system to the cities (Ma, 2004).
The establishment of the joint stock company or shareholding system
provided the institutional framework for companies to issue shares. The transition
from state enterprises to shareholding companies represents a critical step in the
development of a market economy. In July 1984, Beijing Tianqiao Department Store
Company, a state-owned company that received a distinguishing name of the
flagship business in 1958, became the first to register as a joint stock limited
company when it issued shares worth of RMB 10 million. In November 1984,
Shanghai Feile Acoustics Company was also restructured into a joint stock company
and launched an offer of nonredeemable equities to the public in Shanghai. The
shares of Feile Acoustics are worth mentioning because they became a symbol of
China’s development of stock markets. On November 14, 1986, John Phelan,
Chairman of the Board of NYSE visited China, and presented Deng Xiaoping the
emblem of the NYSE as a gift. China’s leaders decided to give Mr. Phelan Shanghai

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Feile Acoustics stock certificate in return. When Chinese leaders presented Mr.
Phelan a Chinese stock certificate, this first OTC securities exchange had opened for
just three months, and had only two stocks, Shanghai Feile Acoustics Company and
Shanghai Yanzhong Industrial Company. Soon after, OTC market emerged in
several major cities.
Several factors contributed to the establishment of stock markets in China.
First, the budget deficit of the central government propelled it to seek alternative
ways of raising capital for State-Owned Enterprises (SOEs). The central
government’s revenues started to decline since the introduction of economic reforms
in 1978, due to falling profit margins in SOEs and the inability of the tax authority to
monitor the nonstate sectors (Gordon & Li, 2003). The central government’s budget
deficits relative to GDP reached record highs in 1979 and 1980, and did not achieve
small surpluses until 1985. In contrast, during the same period, private household
savings surged, thanks to the reforms in both rural and industrial sectors that
increased personal wealth. The central government sought several ways to fund
SOEs, including issuing treasury bonds in 1981 and banks loans. Starting from 1983,
the Chinese government started to change its funding of SOEs from free, budgetary
allocations to bank loans. Bank lending to industrial enterprises increased sharply
from a small fraction of the total capital investment in 1979 to about 80 percent in
1985 (Wong, 2006). A stock market is another way to pool private savings to fund
companies and therefore was among the search of viable alternatives.

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Second, the proliferation of securities issues stimulated the formalization of a
secondary market. Initially the trading of bonds and stocks was prohibited, but in the
absence of a secondary market, black markets emerged in which individual holders
traded securities illegally. In an environment of high inflation, bonds and stocks were
considered a burden on enterprises and individuals and were sold below their par
values far before their maturity date. As a result, buyers who were willing to buy
these securities and hold them to maturity were highly rewarded for taking the risk of
engaging in black market trading (Ma, 2004). The existence of a black market
indicates the public need for liquidity. The Jing’an branch of the Shanghai Trust and
Investment Company, which is a branch of the People’s Bank of China, was the first
to act as an agent for buying and selling shares. This was considered the beginning of
official trading activity in Chinese securities. To further facilitate the transaction
process, the Shanghai Branch of the People’s Bank of China authorized the Shanghai
Trust and Investment Company to organize a special department to act as
intermediary agency for securities transactions among willing buyers and sellers. In
this first OTC market, dealers were authorized by the People’s Bank of China to
conduct trades in trading counters set up by financial companies and institutions.
However, trades in this OTC market were not active. To stimulate trading, Shanghai
government lifted the restrictions on price fluctuations and endorsed the idea of
letting demand and supply determine stock prices. After that, liquidity, stock
issuances, and turnover rates increased rapidly, causing waves of stock fever and
stimulated many illegal activities.

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The controversy
In Chinese culture, a name carries more weight than just a label. In Confucian
thought, before an action is taken, it needs to be justified. The “rectification of
names” represents the legitimation of new policies. Therefore, Confucius said: “If
the name is not rectified, the words will not be reasonable; if the words are not
reasonable, the action will not be successful.” Based on this tradition, the name of an
action indicates the appropriateness of that action. Not surprisingly then, the first
controversy surrounding the Chinese stock market was a controversy about the name.
The question is whether the surname of the stock market is socialist or
capitalist. The surname of the stock market signals the ideological nature of the stock
market. Surnames indicate which family or category the practice belongs to, in this
case, capitalist or socialist. During the early years of China’s reform, to say that an
experiment has a capitalist surname was to say that the experiment was capitalist in
nature. To label something as capitalist is a serious ideological charge. It should be
noted that this question is not only targeted at the stock market, but almost every
important aspect of the economic reform. In addition, this question is not limited by
a certain time period, but is in fact a question that extended many years after the
beginning of the economic reform and stimulated waves of intensive debates over
the last 25 years. This controversy involves extensive debates within what is called
“lilunjie” (“theoretical circles”, 理论界, the intelligentsia), which consists of
professors affiliated with institutions of higher education, researchers in government
sponsored research institutions (such as China’s Academy of Social Sciences), senior

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editors in Party newspapers and magazines, as well as researchers in Party think
tanks, including the Party School of the Central committee of the Communist Party
of China (CPC). Waves of controversies centering on the question of “surnames”
generated wide societal ramifications: they not only attracted close attention and
response from the top leaders, but have also become part of the everyday language.
The aggressor of this controversy interrogated the surnames of the
shareholding system and the stock market based on the political thought of the Old
Left. The basic accusation was that the adoption of the shareholding system and the
stock market had taken a capitalist route instead of a socialist one. For example, Wu
Shuqing ( 吴树清), an economist upholding the planned economy, argued that the
issuance of shares by enterprises would stir the sense of inequality in society, foment
an opportunistic mentality, and open avenues for abuse and malpractice.
Interrogators also contended that the joint stock system creates property that is
privately owned, and that the private nature of these companies determines that the
allocation of resources would be allocation by capital returns, not allocation by labor
inputs. Allocation by capital returns is deemed a capitalist practice, and therefore not
conducive to China’s socialist modernization. Furthermore, other theorists argued
that the shareholding system was a form of retrogression from socialism. Therefore,
the SOE reform should not take the direction of the shareholding system. Socialism
cannot allow people to use monetary capital to speculate in a capital market, and
cannot allow the existence of a social class that makes a living from dividends like
parasites. This argument sees the shareholding system as a historical retreat from the

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socialist public ownership system, because it breaks up the public ownership of
SOEs into diverse ownership types. In addition, if an enterprise becomes a
shareholding company that combines multiple economic systems, then this will not
only cause problems in economic calculation, but will also lead to political and
administrative chaos. Finally, critics cast doubts on the belief that a shareholding
system is good for incentivizing individual motivation and improving efficiency and
productivity (Li, 2001:62, 94).
These charges put serious pressure on reformers. Ideological charges could
well become the ground for punishment, especially at times when the Party launched
ideological campaigns such as the “anti spiritual contamination campaign” in 1983
and “anti bureaucratic liberalism movement” in 1986. During those ideological
campaigns, the CPC strengthens its work on political thought, which means
educating Party members in orthodox Marxist-Leninist thought and Mao Zedong
Thought. Bold economic experimentation is subject to criticisms of capitalist and
bourgeois ideology.
Economists have been instrumental in justifying the economic reform, and in
particular the establishment of the shareholding system and the stock market. As
early as the 1960s, renowned economist Sun Yefang ( 孙冶芳) advocated for the
benefits of a commodity economy that employs the price mechanism (Yang, 1998).
In 1979, about 400 Chinese economists held a meeting to discuss various issues in
economic reform (Yang, 1998). A prominent economist, Professor of Beijing
University, Li Yining ( 厉以宁), was among the first to advocate a joint stock system.

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In fact, Li became famous for his commitment to the joint stock system that he is
widely regarded as “Li Shares.” He proposed to experiment the joint stock system at
a conference organized by the research department of the executive office of the
CPC Central Committee and the National Labor Bureau in April, 1980. Another
prominent economist, Wu Jinglian ( 吴敬琏), an economic scholar at the China’s
Academy of Social Sciences and later the chief economist at the State Council’s
economic research department, was also a strong proponent of the market reform and
gained the name of “Wu Market”.
Economists who supported the radical adoption of market institutions
formulated sophisticated arguments to justify market reform. These justifications
included the careful definitional separation of key terms to protect the adoption of
market institutions from the accusation of privatization. For example, Gong Yuzhi
( 龚玉之), Deputy Director of the Theoretical Research Department of the Central
Committee of the CPC, compared and contrasted the concepts of “socialist public
ownership reformed by markets,” “privatization,” and “market economy of the
West,” and concluded that the economic reform falls under the first category (“On
the Socialist Market Economy,” an interview with Beijing Review in 1992, cited
from (Yao, 1998)). Another strategy is to define the relationship between the state
and the market so that the market reform is not seen as a threat. An economist,
Professor Dong Furen ( 董辅轫), interpreted a “planned commodity economy” as “a
commodity economy under the guidance and regulation of the state (Hong Kong

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Economic Reporter, 1992)”. Thirdly, economists expand the concept of the plan to
assimilate market mechanisms into the orthodox system. For example, economist Liu
Guoguang ( 刘国光) distinguished between the concept of a “command plan” ( 指令
性计划) and a “guidance plan” ( 指导性计划), elaborating how the “guidance plan”
could incorporate functions of the market.
In 1990, Xue Muqiao ( 薛暮桥), a renowned economist, and former
government official who was one of the key designers of the structure of China’s
planned economy, wrote A Letter to the Political Bureau of the Central Committee of
the CPC, and published a book entitled On Several Theoretical Issues about Socialist
Economy. In the letter and book, Xue discussed theories and policies for China
aiming to initiate a market oriented economy. Xue’s theory shaped Deng Xiaoping’s
formulation of the relation of the market to socialism. The argument is that the
market and planning are economic means, and thus can both be employed by
socialist and capitalist countries.

Leaders’ response
It appeared that neither side of the controversy came up with arguments
stronger than the other side. Underlying the oppositional arguments were the
political thought of the Old Left and those of the liberal minded reformists. At the
time of the controversy, the political climate was on the side of the Old Left. In other
words, the Old Left as the aggressor actually enjoyed the presumption. The liberals

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as the defendant had the burden of proof. The liberal side was at a disadvantage since
it had to justify practices that apparently would need significant revisions of
orthodox Marxism. Furthermore, in its essence the debate was not about probing into
the truth of a matter; it was in actuality a clash of opposing political definitions. At
this point, the leader’s response was critical since there was no other means of
persuasion except for the authority of the leader.
Deng Xiaoping expressed his opinion during his famous tour of the south in
the spring of 1992. He said, “Do not debate. This is my invention. The reason of not
debating is to strive for the time to act. Once there is debate things become
complicated, and time is lost, hence nothing can be done. No debates, experiment
boldly, and make breakthroughs boldly” (Deng, 1993: 374). Deng specifically talked
about the experiment of the stock market, “As for securities and the stock market, are
they finally good or bad? Are they dangerous? Are they things that only capitalism
can have or can socialism also make use of them? We should allow them to be seen.
But we should definitely try them out. If we see they are correct, manage them
correctly, we then open them up; if we see they are incorrect, we make corrections
and close them. If we close them, we can close them either quickly, or slowly, or
leave a tail” (Deng, 1993: 373). Deng’s response was strategic. First, he knew very
well that the liberals were at a disadvantage in this debate, and mostly would lose if
the debate were kept alive. The common sense at that time saw a stock market as
anti-socialist and therefore dangerous and illegitimate. Deng’s proposal that the
debate should be put aside and that the experiment should be allowed to exist until

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proven wrong subtly shifted the presumption to the side of the liberals. His argument
that debate was an impediment to progress and change also greatly supported the
presumption that change is good and beneficial. Deng’s strategic response to the
controversy seemed to grant a tie to the opposing sides on the surface level, but it
effectively shifted the political climate from that of a conservative Old Left to a
liberal one.

Policy choices
As the founding controversy, the debate on surnames had important
consequences on the formation of China’s stock market as an institution. Although
Deng’s response effectively granted the liberals permission to continue the stock
market experiment, it did not mean that the liberals completely won the debate. Deng
shifted the presumption regarding the nature of the stock market, but even Deng
himself did not completely contradict the logic of the Old Left. In fact, the concerns
of the Old Left shaped the design of the market institution in important ways. The
stock market and the shareholding system carried significant socialist imprints. The
policy choices regarding the design of the stock market reflected the fact the liberal
ideology lacked the political power to completely claim victory in the debate.
Toward the end of the controversy, the liberals were granted by the leader the
presumption and hence the permission to continue the stock market experiment. But
the Old Left was still a powerful political force, and it exerted influence on the
building of the shareholding system and the stock market. For example, the quota

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system in the issuance of shares shows that the state was still in control of the supply
of shares (Walter & Howei, 2006). From 1993 to 1996, the government imposed an
annual quota on the total amount of capital that could be raised through IPO
issuances (Wong, 2006). From 1996 to 1999, the government changed the quota to
be a function of the total number of companies to be listed. Post-IPO issuance,
including both secondary and rights offerings were also restricted by regulations. On
the demand side, regulations were also in place to restrict the sources of funds that
could be invested in the stock market.
The state controlled investment opportunities by selecting qualified issuers
and determining the offering prices (Yao, 1998). Particular industries, regions and
ownership types were selected to list on the market in different historical times, to be
in accordance with the grand plan of national economic development. To ensure
sufficient demand for IPO issuance, CSRC restricted IPO prices to P/E ratios of
about 13-15 for all firms, regardless of the industry in which they are located.
The state not only regulated stock issuances, but also influenced market
segmentation (Walter & Howei, 2006). To maintain state ownership of the listed
SOEs, shares were divided into tradables and non-tradables. Non-tradables consist of
state shares and legal person shares, which are owned by organizations and social
groups with legal person status. Generally speaking, only 25% - 35% of the total
shares of a listed SOE can be publicly trade on stock exchanges. Besides the
limitations on shares that can be publicly traded, the market is also segmented by
separate rules on domestic and foreign shares. Specifically, there were A shares, B

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shares, H shares, and N shares depending on the stock exchanges on which
companies list themselves. A shares market is traded in Chinese currency, and was
open to only domestic Chinese investors before 2000. B shares were created
specifically for foreign investors and traded in U.S. dollars. H shares refer to Chinese
companies traded in Hong Kong, and N shares are Chinese companies traded on the
New York Stock Exchange. A Chinese company may issue shares on multiple stock
exchanges, but domestic Chinese investors could not invest in shares other than A
shares during the 1990s. This share fragmentation restricted investment channels for
domestic Chinese investors, and it created multiple markets for some of the listed
companies, each with different rules, regulators, and pricing mechanisms.
These regulatory arrangements embody the socialist belief in state planning
and control. By creating segments of shares, making some tradable and others not,
the government was able to keep the socialist identity of listed companies intact. At
the end of 1990s, more than 90 percent of the listed companies on domestic
exchanges remained state controlled.
These socialist institutions of the stock market reflect the balance of power
between the conflicting views of the two camps and the inability of either side to
completely win the argument. Economists advocating radical marketization were
victorious to the extent that the stock market was eventually established. However,
those who feared market institutions as capitalist did not lose completely since they
stamped socialist marks on the stock market. The question on the ideological
illegitimacy of the stock market lingered, which explained the fact that most of the

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first issuers were not big, centrally controlled SOEs. Instead, the stock market was
composed of small, locally owned SOEs, and collectively-owned enterprises.
Chinese society was not yet comfortable with having flagship SOEs on the stock
market.

Second Controversy: Is China’s Stock Market Worse than a Casino?
Development of the stock market and political thought
The first ten years of China’s stock market was a remarkable drama in itself.
The agency regulating the stock market underwent restructuring, effectively unifying
and centralizing power (Green, 2004). The number of listed companies went from a
dozen to more than a thousand. Total stock market capitalization grew to more than
US$507 billion by the end of 2000. China’s stock market capitalization was the
second largest in Asia, after Japan (Wong, 2006). Compared to many stock markets
in transition economies that were plagued by low market capitalization and low
liquidity, China’s market achieved better performance in almost all measures of
stock market performance, including the number of listed companies, market
capitalization, liquidity, and fundraising capacity (Pistor & Xu, 2005).
China’s leaders’ perception of the stock market was also changing. In the
beginning the leaders considered the enterprise to be an experiment that could fail
and be discarded. By the end of the century, they began to see the benefits of a
market. The leaders seized on the idea that the stock market could be a viable
fundraising vehicle for SOEs (Green, 2003). The 1997, 1998, and 1999 are

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commonly referred to as the “three years for saving SOEs from predicaments” ( 三年
国企解困). Under this policy, large SOEs began to list their shares on the stock
market. The IPO rate reached a historical peak. The leaders began to formalize the
stock market by promulgating the Securities Law in 1999. As a result, legal cases
against listed companies started to pick up. Government leaders recognized the
importance of institutional investors in a stock market, and thus the fund industry
was established in 1998.
Although the stock market grew phenomenally, some serious problems
emerged. Stock market manipulation and speculation were the two most serious. As
most listed companies were SOEs, the government had a real interest in the market
and was motivated to directly influence the market (Lee & Lu, 2007). This kind of
institutional environment fostered stock price manipulation. This is referred to in
Chinese as “playing the house ( 坐庄)”. The “house,” or “Zhuangjia ( 庄家),” consists
mainly of SOEs and institutional investors. The prevalence of market manipulation
by SOEs could have been implicitly permitted by some political institutions under
the belief that the state has the responsibility to give a “helping hand” to SOEs, and
that high stock turnover rates result in more revenue for the local governments that
host the stock exchanges (Green, 2004). As Wong (2006) argues, the development of
China’s stock market in the 1990s was driven primarily by speculative investment
behavior. Speculation seemed to be the only way that investors could profit from
investment, since listed companies generally had low investment value. Indeed, most

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companies did not pay dividends. Excessive manipulation and speculation dominated
the scene of China’s stock market, reflected in high volatilities and turnover rates.
Within this context, there was an implicit consensus among individual investors that
the only way to make money in the market was to follow the Zhuangjia. It was of
course, not easy to follow the Zhuangjia. Instead, the Zhuangjia often got out of the
market with all the gains, and individual investors were trapped.
The period of development leading up to the second controversy was a period
under the Jiang-Zhu regime. The stock market during this period was commonly
referred to as the Zhu market. Zhu Rongji’s political thought was akin to
Keynesianism, which placed great emphasis on government regulation. Zhu’s policy
on the stock market was summarized as “legalization, supervision, self-discipline,
and standardization.” While stressing regulation, Zhu’s policy was decisively liberal
in the sense that he wanted to build a genuine market. However, even though the
policy orientation under the Jiang-Zhu regime was liberal, the political climate
within which the stock market developed was complicated by the political power
struggle between the liberals and the Old Left and by the formation and
institutionalization of interest groups. The political power of the Old Left was not
completely defeated, and its political agenda was reflected in the policy that heavily
favored large SOEs. Many SOEs that were listed on the stock market became the
nexus where political power and economic interests interconnected, and thus became
powerful manipulators of the stock market. Zhu as a hard core liberal attempted to
battle the interest groups by launching attacks in the People’s Daily, such as the

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“Special Guest Commentary” in 1996 that accused SOEs for manipulating stocks.
However, the stock market had been characterized by one bubble after another.
There was a sense that the stock market had become a gambling game designed to
capture household money to save the failing SOEs, and was a way for the privileged
to suck other people’s money into their own pockets by promising a chance at
winning a little part of this “take.”
Accompanying the emergence of interests groups, the liberals divided into
two camps reflecting different views on the stock market. Specifically, some took a
more critical position, cautioning the lack of adequate rules and regulations, and
criticizing the rampant speculation haunting the market. Others took a more
affirmative position, advocating a more laissez-faire approach to stock market
development, and cautioning against government intervention in the market. An
average individual investor in China at that time most likely would have a split view.
On the one hand, she was critical of the manipulators, but on the other hand, she was
not happy about government regulation, because the tightening of regulation would
almost always mean drop of prices and decrease of trading activities. The
government was aware of the expectations of individual investors and was anxious to
manage the stock market to satisfy many social groups.
It seemed that neither side within the liberal regime had a strong initial
presumption. Since Zhu Rongji himself held a firm position in favor of strengthening
regulations, the Keynesian side seemed to have the initial presumption. However, the
state was under the influence of powerful interest groups for whom less regulation

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seemed to be preferable. This latter position coincided with the laissez-faire
approach taken by the other camp of liberals, who advocated less government
intervention on the basis of political philosophy.
The controversy
The “casino” controversy was triggered by a report produced by Caijing, an
independent magazine devoted to China’s economic reform. Published in October,
2000, and entitled “The black curtain of the funds ( 基金金金)”, this report was an
insider story of what is going on in the fund industry. The fund industry was
established by the government to foster the role of institutional investors in the stock
market. It was believed that the funds, with professionally trained managers, better
information and knowledge, and legal requirements on disclosure policies, were
capable of changing the norms of manipulation and speculation. The report
challenged many of these assumptions about funds. It questions the practices of
funds and revealed many of the techniques that the funds employed to manipulate
stock prices. The fund industry struck back with a public statement that accused the
report of being inaccurate, unscientific, and seriously distorted. The individual
investors strongly echoed the arguments voiced in the report and expressed sharp
criticisms on the fund industry. A popular show on China Central Television
(CCTV), “Economic Half-an-hour,” interviewed economist Wu Jinglian in October
2000 and January 2001. The show was broadcasted on January 14, 2001. Wu
appeared in another CCTV show on January 13 and expressed his opinions on the
stock market. Wu’s response created an even bigger controversy, which was later

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referred to as the controversy on the stock market as a casino. Starting from January
15, the stock market fell on four consecutive days. The idea that “A word from Wu
Jinglian ruined the stock market” became popular. The controversy escalated when
Capital Week ( 证券市场周刊), a highly influential magazine in securities markets,
published an article on February 8 as a response to Wu, titled “Nine interrogations to
Wu Jinglian.” On February 11, five economists – the leading figure being Li Yining
– organized a discussion in front of the media. The organizers of the conference said
that “the stock market has reached a critical point,” “if Wu wins this debate, then it
will be a disaster for China’s capital market.” The object of the media conference
was said to be “completely counterattack the various speeches of Wu”.
“Wu Market” and “Li Shares” were both slogans in market reforms. Both
economists played leading roles in combating the opponents of market reforms in the
last controversy, now opposed each other in a new controversy. The central
difference between Wu and Li was the current condition of the stock market. In the
CCTV interview, broadcast on January 14, 2001, Wu said that China’s stock market
lacked rules and standards from the very beginning. If this were to continue, the
market would not become a benign place for investment. When asked to what extent
the rules and standards were lacking, Wu replied,
Stock prices are abnormally high, and therefore, quite a lot of stocks have lost
investment value. Looking at this phenomenon from a deeper level, activities
that are out of lines or illegal are prevalent in the stock market, which makes
it impossible for investors to get returns for investment, and the stock market
has become a haven for speculators. Some foreigners said that, China’s stock
market is very much like a casino, and an unruly casino. Even casinos have
rules, such as the rule that says you cannot see others’ cards. In contrast, in

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this market, some people can see others’ cards, can cheat, and can commit
fraud. Activities like playing the house ( 坐庄), stir frying the shares
(speculation, 炒作), and manipulating stock prices have reached great heights
(Wu, 2001: 224).

Wu further described what houses are and how they manipulate the stock prices:
One group consists of the intermediary agencies; another group consists of
some insiders of listed companies, the people who have insider information;
another group consists of the suppliers of capital, who are maybe the banks,
or other capital providers. They plotted together and then buy the shares at
low prices, open a position, and when they accumulate a large amount of the
shares, they start stir frying the shares. There are two ways to fry the shares:
the first is that related agencies buy and sell among themselves, and trade
very frequently to drive up the price. Another way is to have the listed
company to let off good news, which pulls up the price. As long as there is a
large amount of capital flowing into the market, including capitals borrowed
from the bank, the prices can be fried high. When they found that medium
and small individual investors or big investors who are outsiders to the game
follow up, they would slinkingly sell, which would trap the followers, and at
this time the stock price would keep falling down (Wu, 2001: 225).

Wu’s description of the groups that manipulated the market reminded people
of the forensic arguments made in the “Special Guest Commentary” of the People
Daily in 1996. That commentary described the stock market as experiencing a
detrimental bubble, criticized SOEs for manipulating stock prices, and warned
individual investors of speculative trading behaviors. Wu’s critiques were a
continuation of the anxieties expressed in that commentary.
Li Yining defended the stock market, saying that “Just because there are
several Zhuangjia in China’s stock market, it doesn’t mean that China’s stock market
is pitch black.” Li also said,

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I’m the leader for the team that is drafting the Investment Fund Law for the
Finance and Economics Committee of the National People’s Congress.
We’ve fully noticed the article “The black curtain for funds” and the relevant
discussion in the public. I’ve said at the meeting of the Investment Fund law,
that we must first affirm that the investment fund industry has achieved great
development in recent years, and the main aspect of the matter is good, not

like some people described as pitch black. You can imagine that the
securities market is just like a newborn baby, emerging from nothing to
something, the investment fund industry is also a newborn baby, and it is
normal to have problems. But we must see that the fund industry has had big
achievements, and the problems it has are problems with the system, which
are against one’s will. It is not in line with reality if we deny the
achievements of the fund industry (Wu, 2001: 17).

Li defended the market and the fund industry on two grounds. First, he pointed out
that any new phenomenon has problems, and the problems should not be treated as
uncorrectable. Second, he blamed the external environment as being responsible for
the problems of the fund industry.
Many economists also laid out a variety of arguments to counter Wu’s
criticisms. For example, in countering the assertion that it was abnormal for so many
individual investors to stir fry stocks, these economists contended that China’s
individual investors were not too many but too few. In countering Wu’s criticism
that speculation was bad, these economists argued, that there was not a big difference
between investing and speculating, and that there would be no markets if there were
no speculations, bubbles, or Zhuangjia. In countering Wu’s assessment that the
Price-to-Equity ratio of Chinese stocks was too high, these economists proposed that
the ratio was definitely reasonable, and that it was inadequate to do simplistic
comparisons across countries.

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In countering Wu’s denigration of the house, these economists asserted that
the house was the same as the big investors, and that the Zhuangjia was similar to the
market maker, whose role was instrumental in maintaining liquidity. In countering
Wu’s emphasis that the stock market lacked rules, these economists argued that the
lack of rules was justified on the basis that its very survival in the transition of
institutional systems depended on its lack of rules. They also warned that the casino
analogy can be used as a reason for shutting down the stock market, which would
harm investors and delay the market reform, a result that only those who uphold
ideas of planned economy would like to see. These economists further contended
that Wu’s weakness was that he only advocated production economy, and disliked
“virtual economy,” a term they coined to denote the financial and capital market.
They also questioned whether it is appropriate for Wu as an economic expert to say
something so plebeian and emotional. They proclaimed that what Wu described was
surface phenomena, and that Wu failed to appreciate the strategic steps the
government was taking to ensure the healthy development of the market (Li, 2003:
98; Wu, 2001: 3-31).
Facing criticism by these economists, Wu did not strike back immediately,
but he did publish an entire volume on this topic in the same year. In this book titled
Wu Jinglian: Ten Years of Talks about the Stock Market, he took on the burden of
proof and countered each charge with detailed arguments.
In his defense, Wu refuted the accusation that he had generally defined the
stock market as a casino, and he denied the inference that he wished the stock market

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were closed. However, Wu admitted that his view of the nature of the stock market
differed fundamentally from that of Li Yining, who likened the stock market to a
Chinese game. In this game, a flower is passed along from one person to the next,
until the drum beat stops, and whoever holds the flower when the drum beat stops
loses the game. Obviously, players in this game pass the flower to the next person as
quickly as they can. Li used this analogy in a positive way. He claimed that, every
time the drum beat begins, the loser still has the opportunity to pass the “flower” to
others. Wu was much more critical about the implications of this analogy. He said
that if speculation is the heart of the stock market, then it does appear to be
gambling. Investment is purely a re-distribution of capital wealth among different
people, a zero-sum game where one’s gains depend on others’ losses. Wu asserted
that speculation would not increase social wealth, rather, “it is purely a fantasy
thinking that we can rely on speculation to make a nation and its people rich” (Wu,
2001: 9).
Wu’s arguments contain more than defense – he also launches counter
attacks. Responding to the question whether there are too many or too few individual
investors, Wu argued that the very phrase “stir fry stocks” indicates that China’s
stock market is over speculative and bubble-like, which cannot help the nation or its
investors to increase its wealth. The main point is not the number of individual
investors, but they way they trade stocks. Wu further attacked an economist in the
opposite camp, Xiao Zhuoji ( 萧灼基), who had proposed that the government should
intervene to turn around a bear market. Xiao self-identified as an advocate for short-

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term traders and speculative traders. Wu’s point is that Xiao’s standpoints and
arguments contributed to decisions by the government to intervene the market.
Wu also restated his view of the current market as a bubble. Wu referred to
the famous bubbles in the West such as the South Sea Bubble and the Mississippi
Bubble. Closer to home, he identified the bubbles in Japan and the Nasdaq, to
emphasize the detrimental consequences resulting from market crashes. Wu further
pointed out that speculation and economic bubble are particularly likely to emerge
during the period of transition from planned economy to market economy, and that
“an important reason is the lack of clarity in the ownership of SOEs and the absence
of owners” (Wu, 2001: 15). Based on this logic, because SOE managers and traders
are not the owners, they are rewarded when gaining positive returns but do not bear
the responsibilities to pay for their losses. Due to this asymmetry between rewards
and responsibility, managers tend to be more risk-taking in their investment and
squandering the capital owned by the state or the company to engage in unrestrained
gambling and illicit activities. Central to this logic is the criticism of the government
for not setting up clear ownership rights and clarifying the relationship with SOEs.
Wu criticized the government directly for “saving” a bear market, and says that the
government had to correct its own behaviors in order to build a healthy market.
Related to questions on speculation and bubble, Wu also discussed the issue
of the Zhuangjia. Wu refuted the statement that the Zhuangjia is the same as the
market maker in Western stock markets, pointing out the unique features that cause
the prevalence of the Zhuangjia: “The house can directly or indirectly hand over the

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risk of speculation to the government. If the speculation is successful the house
gains, but if the speculation goes badly the state pays the bill. The nature of this
mechanism is that the properties of the whole people are used to ‘subsidize’ the
Zhuangjia who violates laws and rules to manipulate the stock market (Wu, 2001:
20).”
The third argument concerned whether more or fewer rules should be
imposed on market development. Wu directly refuted the idea that more regulation
would depress the market, arguing instead that regulation should be the premise for
market development. This leads to the core of his view of the market. In responding
to the charges that he is more in favor of production economy than a “virtual
economy,” Wu argued that the key difference is not between material and virtual, but
between “traditional/primitive economy” and “modern market economy.”
Furthermore, what distinguishes the modern market economy from the traditional
systems of economy is “rule of law.” Wu defined a modern economy as one where
trade takes place mainly in non-personal transactions with an objective and fair third
party enforcer, and that the relationship between politics and economy is an arm’s
length type of relationship (Wu, 2001: 28).
The idea of a “rule of law” market economy is made sensible when Wu
directed his critique to actors and actions that contribute to the lack of “rule of law.”
Specifically, Wu offered a class analysis of the stock market, pointing out a new
social group was emerging from the transition whose interests lay in the absence of
rules and laws. He contended that a new social group arose during the transition.

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Actors in this group did not have a vested interest in the old system. They did not
want to go back to the system of a planned economy. Nor, however, did they want to
see the establishment of a regulated market with fair competition. Instead, they
wished to maintain or even expand the chaos existent in the current market, so that
they could take advantage of their special position to freely engage in rent-seeking
(Wu, 2001: 28). This social group, according to Wu, exploited individual investors
with their financial “magic,” and conducted property reforms as a way to embezzle
state property, all in the name of the acclaimed “reform.” This social group appeared
to be radical proponents of marketization, and they labeled people such as Wu as
“idealist” or even “conservative.” Wu warned the danger of the public being fooled
by this group of people with vested interest in the current state of the market. He
asserted that this social group could take the country to crony capitalism, since they
represented the roots of corruption: given the absence of clear definitions of property
rights for public properties, those who have power and status embezzle public
property in the process of arbitrary, self-interested administrative intervention of the
market.
Underlying Wu and Li’s disputes are different political philosophies: one
oriented toward Keynesian thoughts and the other inclined to classical economic
theory originated by Adam Smith. In addition, they seemed to be concerned about
different social groups. Li and his colleagues argued that Wu’s words were
detrimental to the stock market because individual investors would suffer huge
financial loss in a market crash. While Li and his colleagues were most concerned

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about participants in the stock market, Wu seemed to be more concerned about the
broader society, especially people who do not participate in the stock market. He is
famous for citing the writer, Julius Fucik, in saying: “People, I love you all. But be
on guard.”

Leaders’ judgment
The “casino” controversy was characterized by intensive attacks and counter
attacks. Both sides actively charged the other side as being unable to prove its
position and acted as if no one held the presumption. The leader was strategic in
responding to this controversy. When asked by a French journalist in the press
conference after the National People’s Congress on March 8, 2001, about his
comments on the casino controversy and the government’s attitudes toward the
development of the stock market, Premier Zhu Rongji replied, “There are many
kinds of views on China’s stock market, isn’t this an indication that China does have
freedom of speech? Therefore, I won’t comment on the current condition of China’s
stock market. Our principles are the Eight-word Principles, which are to strengthen
the legalization, supervision, self-discipline, and standardization of the securities
market.” Zhu refrained from taking sides and commenting directly on the
controversy. This response was strategic in the sense that it left options open for
policy choices. The year 2001 was a sensitive one in that it was the year of the 80
th

birthday of the CCP. It was expected that the Chief Secretary of the Party would
deliver speeches at the anniversaries, especially anniversaries in the last year of a

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decade. More importantly, it was only a year before the 16
th
Party Congress. The 16
th

Party Congress would be held in the fall of 2002, which would generate a new
politburo and a new Chief Secretary of the Party. Following the change of leader in
the CCP, the People’s Congress in the spring of 2003 would then generate a new
government. Facing the change of leadership, much uncertainty existed in the
direction of policies.
Jiang Zemin, the Chief Secretary of the Party, seemed to be more affirmative
in the direction of the reform. During a group meeting with members of the National
People’s Congress, he urged to speed up the corporate reform and shareholding
reform (Li, 2002: 9). Four months later, in his speech at the 80
th
anniversary of the
CCP, Jiang first articulated his theory of the “Three Represents,” a bold theoretical
formulation that called for a new conception of the CCP that is more pro-market,
pro-business, and pro-capitalism.

Policy choices
The immediate consequence of this controversy was its impact on the trend
of stock market indexes. The stock market plunged immediately after Wu Jinglian’s
critiques were publicized. As the controversy went on, market indexes lingered at
low points. It was not until April, when the controversy gradually quieted that the
market started to climb and reached new heights in June 2001.
After June, however, market indexes resumed their fall, and fell 33 % before
the end of the year. Moreover, China’s stock market remained relatively weak for

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five years, a period when China’s GDP increased at a double digit rate every year.
There are numerous factors that caused the market crash of 2001 and the subsequent
bear market. This controversy, however, signifies one of the most important reasons
for poor performance, that is, the government was still trying to figure out its
relationship to the market. The government was still trying to play too many roles in
relation to the stock market: as the designer, regulator, and player at the same time.
The multiplicity of roles was criticized on all sides. The opposition arguments in the
“casino” controversy were both critical of the role of the government, which
negatively affected the public confidence in the stock market. In an attempt to
balance conflicting views on the stock market development, government policies
shifted between strengthening regulations and adopting liberal market practices.
Uncertainty limited the confidence and expectations of investors necessary for
making serious investments in the stock market.
The long bear market did not deter the decision makers from further market
liberalization. For example, many policies associated with socialist values were
revoked, such as the ban on Party members to buy stocks. New policies encouraged
the further development of funds, listing of Chinese firms on international stock
exchanges, and the deliberation on adopting modern practices such as stock market
derivatives. Zhou Xiaochuan was appointed the Chairman of the CSRC in 2000. As
an economist educated in the West, he initiated more rapid reforms to liberalize the
stock market. In a sense, although Wu Jinglian seemed to have had the initial
presumption while he initiated criticisms on the stock market, the policy after the

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controversy moved in the direction advocated by the initial defendant of the
controversy.

Third Controversy: Are Managers Abusing State Assets?
Development of the stock market and political thought
The years following the stock market as a casino controversy were
characterized by unrestrained issuance of new shares, coupled with the reluctance of
investors to supply capital. Issuances of shares are commonly referred to by
individual investors as “entrapping money” ( 圈钱) by listed companies. Indeed, the
sole purpose of many companies to list on stock markets was believed by many to be
a way to get quick cash. Seeing the market as a cash cow, companies fought to be
listed; companies who were already listed continued to issue new shares, in spite of
poor performance. The imbalance between supply and demand depressed the market.
In this context, the decision makers pushed for share reforms, which were to make
non-tradable shares – shares owned by the state and legal persons – tradable. Non-
tradable shares constituted 70 % of all shares, and the release of these shares could
flood the market and further depress share prices.
The initial share structures of listed SOEs enabled the state to justify listing
SOEs on the stock market. In that framework, the state-owned shares and legal
person shares were not-tradable, which alleviated some of the fears and concerns of
the Old Left that listing on the market would change the nature of SOEs. However,
as reform deepened, the government and the investors argued that the share structure

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constituted a problem. The flotation of non-tradable shares, however, posed different
challenges for the government and the investors. The government had an interest in
reducing state shares in listed SOEs because the share prices had increased
tremendously after their first issuance. The state as the shareholder of the non-
tradable shares had not benefited from value appreciation. The government had a
problem: how to sell its shares without agitating the shareholders of tradable shares
who obviously would not be happy to see a value depreciation. Investors in the
secondary market understood that the flotation of non-tradable shares would solve a
structural problem of the shares. However, they were much less enthusiastic, and
even hostile toward this marketization reform, because they perceived the negative
impact of this reform on the share prices. Various names were used in the public
deliberations on share structures, such as “the separation between shareholder rights
and shares” ( 股权分置), “state shares reduction” ( 国有股减持), and “complete
flotation” ( 全流通).
During the second half of the 1990s and entering into the 21
st
century, the
topic of globalization increasingly attracted public attention. Globalization came
with globalized discourse, in particular Western economic theories on the financial
market and relations among economic agents. Agency theory arose as an economic
paradigm in the 1970s and its language prevailed. Agency theorists (Alchian &
Demsetz, 1972; Jensen & Meckling, 1976) used the principal-agent relation and
assumptions on risks and interests regarding that relation to re-conceptualize the firm
and firm activities. For example, stock holders of modern firms are seen as the

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principal who delegates the management of the firm to top executives. The Chinese
leadership appropriated agency theory to frame the state as a shareholder, and thus
the problem of share structures was reconstructed as a classical agency problem
between the principal and the agent. Agency theory also triggered the awakening of
shareholder consciousness, which gave the state a vocabulary to portray itself as an
active, controlling shareholder. As the controlling shareholder, the state retained
control over some selected SOEs, and let go of other SOEs by closing them off or
selling them to private capitalists. Corporate restructuring became popular, and
management buyouts (MBOs) – a privatization scheme that allows SOE managers
purchase the enterprises they manage became a trend in the year 2003 (Zhao, 2008:
287).
While share reform was seen as a technical issue to be tackled by government
policy makers, it became a contentious public issue. State intervention influenced the
supply and demand of shares, and it touched once again on the central problems of
the reform – the relation of the state to market, to the people, and to society. If the
previous controversy focused primarily on the relationship between the state in its
relations to the market, this time the controversy intensified the problematic relations
between the state as an owner or principal of public assets and the SOE leaders as
agents for managing assets.
Globalization also brought the anti-globalization discourse into China.
Critical theories, postcolonial theories, and the thought of Western New Left quickly
flooded the intellectual sphere. The Chinese New Left took the position of criticizing

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the Chinese government for selling out public assets that allegedly belonged to the
Chinese people.

The controversy
On September 9, 2004, Lang Xianping ( 郎咸平), an economics professor at
the Hong Kong University of Science and Technology, gave a speech titled
“Greencool: A Carnival at the Feast of ‘the Retreating State and Marching People’”
at Fudan University in Shanghai. In this speech, Lang criticized directly Gu Chujun (
顾雏军), the president and controlling shareholder of Greencool, a Hong Kong listed
mainland company. Gu’s Greencool became the controlling shareholder of Kelong in
2001, and had subsequently acquired several SOEs. Kelong was a leading mainland
refrigerator company that is also listed in Hong Kong. It was plagued by declining
profits due to a series of top management successions. Lang accused Gu of
embezzling state assets in the process of acquiring SOEs. Lang pointed out that Gu
colluded with the original controlling shareholder of Kelong – the local government
– to manipulate earnings during and after the acquisition of Kelong, thus creating the
impression of turning around Kelong’s poor performance. Furthermore, Gu utilized
the liquidity of Kelong to acquire other SOEs. These acquisitions went particularly
well because those controlling shareholders – many of them local governments –
were in a hurry to sell. Gu’s acquisitions of SOEs took advantage of the
governments’ willingness to “retreat” from SOEs and reform the property rights of
SOEs. Lang’s accusation is based on his own examination of the financial statements

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of these companies. He estimated that Gu used 900 million Chinese yuan to gain
state assets worth of 13.6 billion yuan. Lang concluded that the problems with
China’s corporate reform were very similar to the problems in the privatization of
Russia. There state assets were embezzled due to the absence of laws. Gu Chujun
denied all these charges, and responded by suing Lang for slander.
Lang’s accusation soon escalated into a heated debate among economists. A
dozen mainland economists issued a public statement supporting Lang. But many
other mainland economists saw Lang’s accusation as one-sided exaggeration and a
misunderstanding of the main directions of the reform. On October 21, 2004, a dozen
economists who were the directors and deans of leading research institutions
attended a workshop on “The 20 years of development of Kelong and the roadmap of
China’s corporate reform.” Participants in this workshop overwhelmingly supported
Gu and criticized Lang. Zhang Wenkui ( 张文魁), an economist in the Research
Center at the State Council, said that Lang did not understand SOEs, and did not look
at the right data. He explained that Chinese SOEs do not submit their profits to the
government, and therefore the government does not get a return for the investment.
Since SOEs do not give their profits to the government, China’s state assets are not
capital assets, but rather constitute “corporate assets for social welfare.” In this
system, SOEs take the responsibility for providing for the welfare for its employees,
which affects SOEs’ performance. Only through corporate restructuring and property
reform can SOEs move away from the firm-based welfare system to become more
competitive. A renowned economics professor at Beijing University, Zhang Weiying

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( 张维迎) was especially critical of Lang. Zhang criticized Lang for mobilizing
public opinion by demonizing the image of the entire cohort of Chinese corporate
leaders. In various industry conferences, Zhang identified himself as an advocate for
Chinese corporate entrepreneurs, and praised the birth of some of the most successful
companies in China. He called for the public and the media to be more tolerant of
these corporate entrepreneurs. Furthermore, Zhang questioned Lang’s charge about
the inadequacy of MBO practices. Zhang proposed an analogy to describe the
situation of SOEs. He said that SOEs were like ice-cream. If they were not sold to
entrepreneurs, their assets would likely to melt. Therefore it was inappropriate to
accuse entrepreneurs for buying out SOEs at below market prices.
Economists were deeply divided on the questions of whether Chinese SOEs
and their managers were villains or heroes, whether the top management stripped
state assets in Management Buy-Outs (MBOs), and whether property rights reforms
mean the loss of state assets. At the start of this dispute, the liberals had the
presumption since the reform had been enacted under a liberal orientation, and
MBOs had become a new trend in the reform of share structures in the stock market.
Underlying the controversy was a further divide among Chinese economists
on the direction of market reform. It was driven by the rise of the Chinese New Left.
Similar to the Chinese liberals, the New Leftists were critical of the government.
However, where the liberals believed in the power of the market, the New Leftists
were more critical of the danger of market forces, such as an overly powerful
managerial class. This time, the way the leaders responded to the controversy

210

quickly shifted the presumption from the side of the liberals to the side of the New
Left.

Leaders’ response
As economists were engaging this debate, the National Audit Office started
an investigation into Gu’s company. In September 2005, Gu was arrested for
embezzling state assets. The arrest of corporate entrepreneur Gu symbolized the
position the leader took in response to the debate. It was rare for the leaders to
explicitly take sides in a controversy. Gu was a public figure in China who had made
numerous TV appearances and won great recognition for being a successful
corporate entrepreneur. His sudden fall from grace seemed to be a tipping point in
society’s attitude toward entrepreneurs. Whereas previously the rising social group
of corporate entrepreneurs were admired and praised for the wealth they accumulated
during the reform, the new trend became that of suspicion and even hostility toward
the wealth gained by this social group. There were discussions about the “original
sin” of these Chinese capitalists in the society as well as in top level meetings of the
CCP. “Original sin” was used to describe the fact that many entrepreneurs gained
their seed money through illegal means. Whether the “original sin” should be purged
became a contentious topic. The arrest of Gu symbolized that the presumption of the
society had once again shifted, this time, away from the liberal side.
It should be noted that the regime had changed to a new one led by leaders
who explicitly expressed concerns for the losers of the reform. The change of

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political orientation in the regime may have also contributed to the new position
adopted by the leaders.

Policy outcomes
While the previous controversy addressed the relationship between the state
and the market, this one dealt with the conflicts between the state as the shareholder
and SOE managers. Its emergence indicated that managers were gaining power and
leverage over the use and management of their companies during the process of
corporate reforms. Many individuals with management talents rose to top
management positions and gained national popularity. The government was
uncertain about how to deal with this rising managerial class. On the one hand, these
managers had the potential to reinvigorate the failing SOEs, but on the other hand,
they could appropriate state assets in the absence of oversight and adequate valuation
methods.
The controversy resulted in the state taking stronger positions to monitor the
corporate restructuring and property reform of SOEs. State-owned Assets
Supervision and Administration Commission of the State Council (SASAC)
provided detailed rules on the transferring of state property rights on September
2004. On October 29, 2004, the SASAC published an editorial in People’s Daily,
saying that the practice of “management shares” will be terminated. The Vice
Premier, Huang Ju, spoke in a conference of big SOEs owned by the central
government, stating that big SOEs will not be permitted to have MBOs.

212

Furthermore, the “big shareholder model” in corporate governance, which
provides extra incentives to managers, was no longer promoted, due to concerns for
the increased inequality between workers and managers (Oi, 2005). Economists were
divided on the basis of political-philosophical orientations. While some still criticize
various government interventions, advocating the classical liberal ideology, others
speak for the disadvantaged groups. While the new liberal ideology still dominates
the power elites, concerns for social inequality and fairness have pressured the state
to slow the speed and scope of corporate restructuring and adopt corporate
government practices that differ from the American model.

DISCUSSION
Controversies as Tipping Points for Institutional Change
Debates, disputes, and controversies have figured in many studies of
institutional change. However, the way in which controversies affect institutional
change has not been thoroughly examined. This study proposes a model for
systematically analyzing how controversy affects policy choices. Specifically, in any
controversy there are aggressors and defendants. Either side may enjoy the initial
presumption. However, once a controversy arises, the aggressor and the defendant
may shift roles and both can demand that in the situation at hand rational justification
be offered. The opposing arguments by aggressors and defendants push the boundary
of taken-for-granted norms and practices, expose problems that have been dormant,

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and interpret particulars and gather evidence into justifications to do more or less in
different directions.
Opposing arguments can lead to a shift in the presumption. An important
moderator in this process is a third party actor – the leader who also employs
argument to engage in the controversy and whose authority may determine where
presumption would reside at the end of the controversy. Through shifting the
presumption, controversies become the possible tipping points for changes in policy
directions. Figure 5.3 maps out the aggressor, the defendant, and the moving
direction of presumption as a result of the controversy and leader’s response for the
three controversies surrounding the Chinese stock market.

Figure 5.3: Aggressor, Defendant, Leader, and Presumption in three
Controversies
Initial Aggressor Initial Defendant Leader
1
st

Controversy
Old Left had strong
initial Presumption
Liberals got
presumption in the
end
Leader’s response
shifted presumption
to the liberal side
2
nd

Controversy
Liberal Keynesians
had weak initial
presumption

Free market liberals
got weak
presumption in the
end
Leader’s response
slightly shifted
presumption to the
free market side
3
rd

Controversy
New Left got
presumption in the
end
Liberals had initial
presumption
Leader’s response
shifted presumption
to the New Left

The three controversies discussed in this essay shaped the trajectory of the
institutional change accompanying fifteen years of stock market development. Figure

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5.4 graphs the three controversies as tipping points that shift the political climate of
the Chinese society.

Figure 5.4: Trajectory of Institutional Change*
Year Ideological Left Ideological Right

Old Left New Left Keynesian Free-Market

1991
1992
1993
1994
1995
1996
1997
1998
1999

P

P

2000
2001
2002
2003

P P

2004 P P

(*P indicates the position of presumption. The oval shape indicates the controversy.)

Specifically, the controversy over the nature of the stock market between the Old
Left and the liberals ended in a shift of presumption from the conservative Old Left
to the liberal side. This liberal ideology was characterized by a pro-market and pro-
business mentality and pervaded for more than ten years. During these years, the
policy orientation was predominated by Keynesianism which favored strong

215

government regulation; but the liberal right which favored less government was also
extremely popular and influenced policy making. The controversy over whether the
stock market was like a casino in 2000 pushed the presumption further in the
direction of the liberal right. The controversy over management buyouts in 2004
shifted the presumption from the liberal right to a leftist direction, albeit one that was
influenced by the political thought of the Western New Left and was profoundly
different from the Old Left. All three controversies represent tipping points for
changes of political climate and policy directions.

Where Do Controversies Come From
This study proposes that controversies originate in the clash of different
political views. Different political ideologies such as the Old Left, the liberal, and the
New Left in China have formed consistent set of arguments regarding specific topics.
As new political thought gathers momentum, old political thought does not
necessarily fade away. The collision of political thoughts generates debates since
people’s beliefs, ideals, and interests are at stake.
Tracing the topics of the three controversies and analyzing opposing
arguments, this essay argues that the controversies emerge at times when there were
shifts in the dominant political thought.
In a context of great uncertainty, political thought provides the logic for
action. Shifts in political thought cause fluctuations in policy formulation. But they
also allow for the continuous modification and adjustment of practices based on

216

social expectations and the ongoing renegotiation of beliefs and interests among
different social groups.

How Leaders Manage Controversies
Chinese leaders have not been hostile to controversies. On the contrary, they
have been active participants in public debates through their own carefully designed
interventions. For example, the Old Left aggressor in the first controversy was
apparently enjoying presumption and would mostly likely have won the debate.
Deng Xiaoping, the paramount leader at that time, voiced a pragmatic position,
which was to discontinue the debate and take an experimental attitude toward the
stock market. Deng’s argument effectively changed the criteria for the debate, and
shifted the presumption from the Old Left to the liberal-minded reformers. Deng’s
authority helped make the shift, but he did not use his power to suppress the debate.
Instead, he provided his rationales, explanations, and boundaries that spoke to both
sides of the debate. Although his own orientation lay more in the liberal side, he did
not explicitly take sides in the debate, which meant less resistance from the Old Left.
The second controversy took place under a regime that was pro-business and
pro-market. Economists, however, were divided regarding the stock market. The
aggressor in this controversy saw the stock market as completely ineffective and
corrupted and the defendant saw primarily a healthy market with great potential and
bright future. This time the leaders refrained from making direct comment on the
controversy. The leaders reaffirmed that they would continue to strengthen

217

regulation, which was a positive response to the aggressor who was critical of the
stock market; however, the leaders also stressed that the stock market was in a good
shape and that the government would continue to liberalize the market, which was an
affirmative response to the defendant who had been praising the stock market. The
leaders’ response exemplifies the wisdom of the authoritarian leader. The
authoritarian leader demonstrated an appeal to democracy through carefully
integrating arguments of the opposing sides of the debate.
The third controversy took place between economists who accused managers
of abusing state assets through management buyouts, and economists who defended
managers for saving non-performing SOEs. The leaders this time took a clear
position on the side of the aggressor and adopted actions accordingly. Years of pro-
business and pro-market reform had resulted in many social problems, and the new
regime perhaps already had an agenda to correct some of the policies adopted by the
previous regime. The leaders seized on the controversy between economists, utilized
the uncertainty and ambiguity created by the controversy to shift the presumption of
the social community to support their new agenda.
In sum, a key argument in this essay is that controversies should not be seen
as errors to be corrected, failure to achieve agreement, or outburst of irrationality.
Rather, controversies are a key mechanism of institutional change. They are the
means by which various interactions occur, between opposing arguments, between
arguers and the authoritative judge, and between the elite and the populace.

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In China’s economic reform, opposing arguments among economists serve to
unfreeze taken-for-granted values and norms, and often result in the creation of new,
hybrid forms of institutions. These institutional forms reflect the negotiation and
reconciliation between opposing sides, and are a mixture of both the market logic
and the socialist logic.

219

CHAPTER 6: CONCLUSION

The puzzle motivating this dissertation was how an elite can drive radical
institutional change without themselves losing power. Specifically, how the CCP
orchestrated a capitalist transformation while retaining their political control. The
general thrust of the argument was that institutional change can be seen as a
rhetorical movement that infuses rationality, reason, and legitimacy into the new
institutions. The general findings of this project suggest that Chinese leaders have
been very effective in using rhetoric to legitimize the institutional change and
simultaneously to buttress their own authority.

SUMMARY OF FINDINGS
I have argued that the rhetorical movement for top-down institutional change
must meet three requirements . Specifically, in order for the Chinese leaders to lead
China from a central command economy to a market-based economy, the first
rhetorical requirement was to unfreeze the institutionalized assumptions regarding
the existing economic order and relationships. This necessitated opening up an
argumentative space for discussion and debates. Second, the Chinese leaders need to
obtain and maintain credibility and trust-worthiness as the representatives of change.
This was particularly difficult since the radical nature of the reform posed a
challenge to the legitimacy of their leadership. Third, the Chinese leaders had to deal
with the resistance that naturally accompanied the attempted changes.

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Chapter 3 discussed casuistry as a rhetorical strategy that the leaders
employed to open up the space for argument. Specifically, this chapter builds on
Burke’s (1984 [1937]) discussion to identify four types of casuistry: dissociation,
association, substitution, and stretching. These casuistries work at the level of
concepts and slogans. Dissociation disrupts the established meanings of a slogan;
association connects concepts that are previously not connected; substitution replaces
an old concept with a partially overlapping concept; and stretching refers to the
extension of a concept’s meaning to include new properties and cases.
Through the use of casuistry, Chinese leaders created slogans and theories
that were strategically ambiguous and multifaceted. New and controversial meanings
were introduced gradually and subtly, and the preservation of old and orthodox
meanings ensured some degree of continuity with the past. Diverse audiences may
have highlighted different aspects of these slogans and theories, interpreted them
differently, and employed them selectively to support their own propositions.
Casuistry enables institutions to change radically under the disguise of gradualism
and incrementalism. It can be used to justify actions and policies ranging from the
political left to the right, because a wide range of policies and actions can find some
kind of support in the re-interpreted original slogans and theories. Therefore,
casuistry effectively creates the space for new arguments and practices.
Chapter 4 discussed the construction of ethos as a rhetorical strategy for the
leaders to maintain their legitimate authority even as they institute radical change
that potentially could have undermined their authority. Ethos, or the character,

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credibility, and trustworthiness of the speaker established in speech, is one of three
means of persuasion articulated by Aristotle. This chapter distilled three types of
characters embedded in rhetoric, taking inspiration from Aristotle’s framework of
rhetorical genres to guide a reading of a body of rhetoric collected systematically in
the People’s Daily. Specifically, epideictic rhetoric, or the rhetoric of display,
definition, and education, constructs the character of the speaker as an educator;
forensic rhetoric, or the rhetoric of prosecution, accusation, attacks, constructs the
character of the speaker as a prosecutor; deliberative rhetoric, or the rhetoric of
expedience and decision making, constructs the character of the speaker as a
manager.
Through the use of these three rhetorical genres, the speaker manipulates the
relationship with the audience, thus foregounding a particular type of speaker-
audience relationship that infuses the speaker with the legitimate right to speak.
Specifically, the use of epideictic rhetoric allowed Chinese leaders to enhance their
right to define and educate. The use of forensic rhetoric gave these leaders the
opportunity to increase their perceived fairness and righteousness. The use of
deliberative rhetoric enhanced the Chinese leaders perceived ability to achieve
optimal results. Furthermore, this chapter traced a staged model for the combination
of rhetorical genres used by the Chinese leadership. The sequence featured epideictic
rhetoric in the early period, forensic rhetoric in the middle, and deliberative rhetoric
in the later period of the institutional change process.

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The conventional sociological perspective suggests that legitimate authority
comes from tradition, charisma, or rational-legal foundations. This study suggests a
complementary perspective – that different forms of legitimacy are grounded in
different discursive forms of authority, or the right to speak given by the audience.
The Chinese case followed the sequence of epideictic, forensic, and deliberative
rhetoric. This sequence helped facilitate a smooth beginning, a vital middle stage,
and an effective implementation of policies. This sequence allows the incumbent
leader to maintain the right kind of authority throughout the process of change.
Future research might usefully test whether this sequence is generalizable.
Chapter 5 outlined a model of controversies as important tipping points for
policy formation. This model built on Goodnight (1980) to propose that oppositional
arguments in a controversy arise as new political thought gathers sufficient
momentum to collide with established political thought. Aggressors and defendants
in a controversy hold different sets of presumptions on the basis of their political
thought. Either side may enjoy the initial presumption at the start of the controversy,
depending on which political thought is dominant at a given point in time. As the
argumentation process unfolds, arguers struggle to establish the ground on which to
proclaim and evaluate action plans. It is uncertain which side’s presumption will
dominate the debate based on the strength of arguments, therefore response from an
unbiased judge is considered important. Controversy provides the leader with an
opportunity to engage in the re-ordering of presumptions and thus shifts the political
climate of the community.

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Through the management of presumptions, Chinese leaders strategically
intervened in controversies that were taking place in the public sphere initiated by
prominent economists. Rather than suppressing public disagreements or silencing
opposition, the Chinese leaders made use of disagreements and oppositions through
carefully designed speech acts. Whereas the controversies themselves reflected a
tension between competing presumptions in need of a resolution, the arguments and
positions that the Chinese leaders took in response to controversies managed that
tension. The Chinese leaders helped to establish a middle ground on which
competing parties control provisionally more or less of the territory, which may
change again when the conditions for a new controversy are ripe.

CONTRIBUTIONS
This project makes a number of contributions to organizational research and
China studies. The first contribution relates to the study of the relationship between
government and market, or more generally, between hierarchy and market. The
second contribution relates to strategic leadership in organizational change. The third
contribution concerns the area of China studies.

Relationship between State and Market
Institutional sociologists have attributed the emergence of capitalism in the
West to the growth of rationality, conceptualized as a rule-based, impersonal form of
action and reasoning that gravitated towards efficiency and utility maximization

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(Scott, 2003). This idea of rationality is embodied in the rational-legal form of
bureaucratic organizations as well as the ideal-typical concept of the market in the
neo-classical economic tradition. In the context of organizational theory, the market
represents a belief in individual sovereignty and self-interested instrumental
rationality, arms-length transactions as the basic exchange pattern, and price
mechanisms that are utilized for adjusting social arrangements.
A large body of economic literature has compared the market with planning
modes of organizing economic activities, examining various kinds of market
socialisms as alternative modes of reconciliation between market mechanism and
state control (Stiglitz, 1994). While liberal economists, such as Mises, Bawerk, and
Hayek uphold the principle of the free-market, other economists, such as Lange,
Arrow, Hurwicz, and Roemer, advocated mixed or socialist forms of organization.
In addition to the debates among economists, sociologists have examined the
relations of the state to market. While some believe that the rise of the market in the
former socialist countries will inevitably lead to the decline of state power (Nee,
1989), others disagree (Lin, 2001; Walder, 1995). In both developed capitalist
countries and developing economies, there is considerable rariation in state-economy
relations (Dobbin, 1994; Evans, 1995). In emerging economies in particular, there
are numerous hybrid forms that are quasi-public and quasi-private (Francis, 2001).
At a more abstract level of conceptualization, contemporary organizational
research distinguishes between the market and the hierarchy as two organizational
forms with the price mechanism and authority as the two operating principles

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(Williamson, 1991). Recently, organizational research has identified a third form of
organization: the community form which operates on the basis of trust (Adler, 2001).
The rhetorical perspective of this dissertation resonates with the idea that modern
organizations are not only a mixture of voluntary contracts and fiat control, but also
require subjective assessment of each other’s credibility, character, and
trustworthiness.
China’s economic transformation has implications for conceptualizing the
relationship between the state and market. It testifies to the possibility of new forms
of organizing. It is a mixture of strong ideological work, intensive acculturation, and
the profound feeling of both the possibility for revolutionary change of the masses
and the enormous constraint on individual freedom. In the West, modernization has
created differentiation among different spheres of activities, and it is only a recent
trend that scholars acknowledge that the boundaries between different spheres are
perhaps more fluid and co-entangled than what have been previously conceived. The
predominant emphasis on technical and formal rationality has been confronted by a
realization of the social embeddedness of market activities. Comparing to the West,
China has taken a different approach to modernization. It has made the leap to jump
to a socialist ideology before capitalism was fully developed. It started with a society
characterized by non-market, central command order, and re-introduced market
rationality into this pre-existing system. The economic reform represents an effort to
“socially construct” a market, in the literal sense of the term. The resulting logic of
organizing has been characterized by the combination of an ever penetrating state

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and an ever expanding market. Contrary to conventional predictions, the power of
the state has not declined as a result of the growth of the market. Rather, the state and
the market have become deeply intertwined, not in a sense of a clear role
specification as described by Evans, but more in the sense of continuous theorization
of the nature of the relationship. The China story may lead to a more complex
understanding of the interplay of market, hierarchy, and trust-based forms of
organizing.

Strategic Leadership
A small current of research in strategic leadership has emphasized the leader
as the rhetor (Eccles & Nohria, 1992). This project contributes to this line of research
by explicating the rhetoric of authority. By examining the rhetorical processes and
strategies that the Chinese leaders employ in legitimating the stock market in a
communist regime, this project highlights the rhetorical inventions of the Chinese
leaders. Leaders possess authority; authority not only dictates through the formal
positional power but also stimulates and motivates through rhetorical imagination.
As Burke notes, authority is the engine for imagination (Burke, 1969: 123).
China’s transformation has broader implications for orchestrating strategic
change. Incumbent leaders of other types of organizations also face the need to shift
policies in a radical matter, e.g., reversing existing policies that previously were
authorized by the same leader. Politicians may find themselves in the situation where
they need to explain why they adopt a position that is the opposite of what they

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initially claimed. In ancient Greek, the sophists were said to have the ability to make
convincing arguments for a position in front of an audience in the morning, and then
make arguments just as convincing for the opposite position in the afternoon. This is
not to say that there is no truth. The point is that through the power of rhetoric
radical change of policies does not necessarily result in the change of leadership.
However, the situation poses specific challenges to the incumbent leader. To
initiate and justify change while at the same time maintaining the authority position,
the strategic leader needs to use symbols wisely. The chapters on casuistry, ethos
construction, and controversy provide some concrete examples on how leaders may
employ rhetoric to exploit contradictions, mobilize for change, and build legitimate
authority.

Studies of China’s Capitalist Transformation
Most studies of China’s capitalist transformation have focused on behavioral,
psychological, or economic factors. Few studies provide insights into the agentic
construction of collective representation, symbols and rituals. My dissertation asks:
how did China come to decide the form of the reform and the manner in which it is
conducted? What is the logic that governs thinking and reasoning? How did China
justify the reform in its own language? I investigate the indigenous vocabulary of
change that Chinese leaders used to guide and justify the radical change they
initiated.

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Susan Shirk’s study of the political logic of the Chinese authority (Shirk,
1993), Kluver’s analysis of the legitmation rhetoric of the Chinese Communist Party
(Kluver, 1998), and recent attempts at approaching the transition by looking into the
rhetoric of the Chinese leadership (Lu & Simons, 2006) represent related effort by
scholars. This project extends their approaches by offering a rhetorical institutional
analysis of the Chinese capitalist transformation. The contribution of this project to
China studies lies in three areas.
First, this project focuses on the symbolic process of this institutional change
rather than materialist structures. The symbolic aspect of the economic
transformation is an important area of investigation, because it bears on the reasons
and arguments that motivated social actors to comprehend, accept, and implement
certain policies and actions. To ignore the symbolic aspect of institutional change
leads to an incomplete story of how change is possible. Institutional change is
possible only if actors are mobilized to regard the change as reasonable, appropriate,
and desirable. This study provides a detailed account of the symbols made and used
by the Chinese, thus laying out the process of institutional change through tracing the
evolution of the meaning-making process. By focusing on symbols and meanings,
this project introduces to observers of China to the way the Chinese have
conceptualized and justified this transformation.
Second, this project places emphasis on the discursive legacy of modern
China instead of traditional China. Scholars who study traditional Chinese beliefs
and value systems tend to overlook the modern elements that constitute the Chinese

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mentality. The collective consciousness of modern China is profoundly different than
traditional China. Modern Western political thought has provided China with much
of the discursive resource in play today. In analyzing the original speech made by the
top leaders of the CCP, by authors of the People’s Daily, and by prominent
economists, this project shows that traditional Chinese beliefs, such as Confucianism
and Taoism, were rarely invoked, and that modern Western thought had been drawn
on heavily for making the arguments.
Third, this project describes two sets of actors who have provided much of
the discourse in the institutional change: the power elite, and the intelligentsia. The
top leaders in the CCP have been responsible for the articulation and population of
theoretical inventions. The intelligentsia has provided ideas, and more importantly,
offered criticisms. The building of the stock market has been characterized by wide
fluctuations of policies and waves of controversies. This is perhaps because both the
power elite and the intelligentsia are characterized by internal division, political
faction, and evolving compositions of alignments based on difference in ideals,
ideologies, political thoughts, and material interests. These divisions and
controversies have created turbulence in the policy changes. However, they have also
become a force that prevented quick adoption of new practices and quick
abandonment of old ones. Oppositional arguments have kept things somewhat
unsettled, but they may have also benefited the reform by prolonging the process of
interrogation.

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LIMITATIONS
This project’s case study design limits the generalizability of findings.
Specifically, the Chinese capitalist transformation as a single case has idiosyncratic
characteristics that may not lend themselves to common experience of the general
population. In addition, the research design samples on the dependent variable,
which is the material outlook of China’s system. China’s capitalist transformation is
yet to reach a conclusive stage, and is marked by uncertainty about future outcomes.
The Chinese leaders have managed thus far to successfully initiate radical change
while simultaneously maintaining power and control, but that may well change.
Future changes in material outlooks of Chinese political institutions may prove some
of the rhetorical strategies discussed in this dissertation to be pitfall. Related to this
limitation, I have touched only briefly on the costs of these rhetorical strategies. Such
costs may include increased hypocrisy that people attribute to the leaders, augmented
tension between the free-market practices and arrangements and the will of the
political institutions, and wastes of talents and resources devoted to the maintenance
of failing institutions. The lack of attention on the costs and downsides of these
rhetorical strategies is due partly to the scope of this project. I deal only with the
question of how elite agents can initiate radical change without losing control; I did
not address the question of why they do that or what motivate them. The latter
question calls for critical analysis of the relationship between power and institutions.

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GENERALIZABILITY AND FUTURE RESEARCH
This project suggests several areas of generalization and future research.
First, the findings of this project can “ring true” in other settings. Although the
Chinese capitalist transformation is unique in many ways, the research questions this
case study raises are not idiosyncratic. In a nutshell, this dissertation identifies
rhetorical strategies that incumbent leaders can use to orchestrate radical change
without a regime change. These rhetorical strategies have applicability in other
settings of elite-led radical change. For example, modeling China’s society as a
modern corporation can help scholars see the relevance of this case study to strategic
organizational change. Incumbent CEOs of a business organization face similar
rhetorical requirements in initiating radical change, and can employ the same
rhetorical strategies to implement change successfully.
Second, the rhetorical movement approach on institutional change can
facilitate future development of conceptual and theoretical frameworks in studies of
institutions and organizations. In terms of casuistry, future research may clarify the
conditions that facilitate or inhibit the use of casuistry in radical change, discuss the
consequence and performance implications for using casuistry, and propose
frameworks for understanding how casuistry relates to institutionalization. With
regard to ethos or the rhetorical construction of character, future research may test
the generalizability of the rhetorical sequence found in the China case and propose
ways to use the rhetorical sequence to conceptualize different kinds of change.

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Future research can also build on my study of controversy to theorize the relationship
between controversy and institutional change.
Finally, future research can extend the study to other post-communist
countries and developing economies. Comparative studies of China’s capitalist
transformation with other societies can provide evidence of how differences in
rhetoric may account for variations in material practices and arrangements.

CONCLUDING COMMENTS
As I finalize this dissertation, the U.S. has been going through a financial
crisis: a crisis which first started in the failure of subprime mortgage practices,
bursting the housing bubble, and then spread into the entire financial sector, which
resulted in a stock market crash and a national, even international crisis and
economic downturn. The unexpected magnitude of this crisis has generated debate,
and has reopened discussion on the relationship between the government and market.
As a Washington Post columnist humorously put it, “We are all Chinese now,” in the
sense that “we have a nominally capitalist economy, but we don’t trust the
freewheeling private market when it comes to the crunch. So we turn to the
government for protection and stability.” Barak Obama, the newly elected American
president, has been busy pushing for a series of stimulus packages and plans,
including the injection of billions of dollars into the economy, even the
nationalization of banks. As a talented rhetor, Obama understands that rhetoric is no
empty matter, and that his actions and policies have to be accompanied by forceful

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justifications. In a speech to Congress on February 24, 2009, he argued, “I reject the
view that says our problems will simply take care of themselves, that says
government has no role in laying the foundation for our common prosperity, for
history tells a different story.”
In the mean time, the U.S. elevated its strategic relationship with China, as
China has gained some degree of credibility in the global economic recession by
being a stabilizing force. In the G20 financial summit in London, Obama and the
Chinese leader Hu Jintao met on April 1, 2009. Obama and Hu “pledged that, as two
major economies, the US and China will work together, as well as with other
countries, to help the world economy return to strong growth and to strengthen the
international financial system so a crisis of this magnitude never happens again.” The
recognition of China by the U.S. as a “major economy” says much about the
transformation that China has achieved.
Words have made a lot of difference in the Chinese transformation. Just as
Barak Obama pointed out in a debate with Hilary Clinton in a primary presidential
debate, “The truth is, actually, words do inspire.”

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Abstract (if available)

Abstract This project investigates China's capitalist transformation from 1978 to 2008. While most studies emphasize structural aspects of China's market-oriented reform, such as economic, political, and cultural structures, this project examines agency of the power elites in legitimating such transformation. Elite agency is conceptualized as rhetorical creativity - innovative articulation of new realities and rationales, exploiting multiple and potentially conflicting institutional logics to legitimize change. This project focuses on the introduction and development of the Chinese stock market and explores how Chinese leaders have theorized and justified a quintessentially capitalist institution in the name of Marxist and communist ideologies. Specifically, I discuss three rhetorical dimensions of elite-led radical change. First, my analysis shows how Chinese communist leaders use casuistry to stretch the concept of communism to open up space for arguments justifying free-market practices. Second, I demonstrate how Chinese leaders engage in the institutional work of ethos construction in order to maintain credibility and trust with followers. Third, I illustrate how leaders intervene into debates and controversies by managing presumptions, thus influencing the direction and pace of the transition from plan to market.

Linked assets

University of Southern California Dissertations and Theses

Asset Metadata

Creator Li, Yuan (author)

Core Title Rhetoric in elite-led radical change: China's capitalist transformation from 1978-2008

School Marshall School of Business

Degree Doctor of Philosophy

Degree Program Business Administration

Publication Date 07/16/2011

Defense Date 05/18/2009

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag agency,China's capitalism,institution,legitimacy,Market,OAI-PMH Harvest,rhetoric

Place Name China (countries)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Adler, Paul S. (committee chair), Green, Sandy E. (committee chair), Goodnight, G. Thomas (committee member), Kennedy, Mark T. (committee member)

Creator Email yuan.li.2007@marshall.usc.edu,yuan.li@mcgill.ca

Permanent Link (DOI) https://doi.org/10.25549/usctheses-m2372

Unique identifier UC1179777

Identifier etd-Li-2796 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-571310 (legacy record id),usctheses-m2372 (legacy record id)

Legacy Identifier etd-Li-2796.pdf

Dmrecord 571310

Document Type Dissertation

Rights Li, Yuan

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Repository Name Libraries, University of Southern California

Repository Location Los Angeles, California

Repository Email cisadmin@lib.usc.edu