This recent visitor to China was struck by the sheer scale of the building work going on. Chinese friends claimed that one fifth of the world's cranes currently operate in the country, and it isn't difficult to believe this. Fifty years ago this month, the Chinese Communist Party (CCP) secured control over the whole of this vast land, winning a civil war against the Guomindang which had lasted intermittently for two decades.

China is also undergoing the most rapid industrialisation yet seen in human history, in which (in the words of Paul Theroux), "Yesterday's paddy field is tomorrow's high-rise, and a thousand factories bloom". Twenty years ago Shenzhen, near Hong Kong, was merely a rural hamlet; today it is a super-city with four harbours. Suzhou Industrial Park, near Shanghai, known as "Little Singapore", is currently under construction after foreign investment of $20 billion and will soon house 600,000 people. Shanghai itself is once more Asia's largest city, its polluted skyline dotted with high-rise towers, its rivers spanned by new bridges and its new roads teetering on top of the old, all built with the new money.

The Chinese government claims the economy has grown by 7% per year, compared with a global figure of 3%. Britain took 58 years, between 1780-1838, to double its per capita income, whereas China managed the same feat in the nine years between 1978-87, and again between 1987-96. China is now the world's largest producer of grain, meat, cotton and peanuts, as well as steel, coal, cement, fertiliser and TV sets. Already the second biggest economy in the world, it is expected to rival the US as the largest on the planet within two generations. Even for the sceptical observer unimpressed by government hyperbole, it is hard not to be amazed by the scale of transformation which China has undergone over the last 20 years when you see it with your own eyes.

Yet China remains a largely agricultural country. Stray off the urban highway and into the rural hinterland, where more than two thirds of the population still live, and you find more than 300 million people still subsisting on less than $1 a day. In both town and country the state of the toilets indicates the extent of development: 90% of rural toilets are still a hole in the ground, and even in Shanghai, a metropolis of twelve million inhabitants, only half the residents can flush away their waste into the sewage system.

Chinese poverty is impossible to hide. In Beijing, painters and decorators hawk for business on street corners while the army of builders live in corrugated iron huts, or within the walls of their constructions, hosing each other down at night after working a 16-hour shift. Last year, 20 million workers were sacked or indefinitely sent home, yet the government quotes a figure of 3% for unemployment: the real figure must be ten times higher. And workers suffer from the arbitrary caprice of the authorities: three men were recently arrested for using inferior materials when the Xinguing highway collapsed. They were not engineers, but farmers with no qualifications, drafted in to do the work by the same authorities who now punish them.

If the last 20 years have been an economic rollercoaster for Chinese workers, the previous 30 were no better. When the three million-strong peasant army came down from its mountain strongholds in 1949 it surrounded and then occupied the cities, much as the conquering barbarians had done from the north in China's long imperial history. The new ruling class organised by the Communist Party expanded out of the mini-states it had created in isolated provinces over the previous 20 years, and proceeded to replace the rule of the landlords and the capitalists with their own form of exploitation on the blueprint of the Stalinist USSR.

Stalinism with Chinese characteristics centred on the danwei, a system of control through work units, which were responsible for the distribution of housing. The symbolic rent and low prices indicated the absence of a market and the prevalence of direct means of surplus extraction. Coupons for sugar, rice, soup and cigarettes were still a visible part of life a decade ago; food was rationed and people queued in the cities for their share. A huge pool of slave labour, incarcerated by the 1970s in over a thousand labour camps, served both as an economic resource for the state and a chilling reminder of the costs of opposition.

Farmers were forced into collective farms and made to deliver their agricultural surplus to the state. China repeated the folly of the Russian model it followed, experiencing a famine of gargantuan proportions between 1958-62, together with successive economic experiments foisted on a savagely oppressed population. There were absurdities such as backyard steel furnaces, which used up as much steel as they ever created, and bogus model "communes" whose output never filled the bellies of the hungry peasants. A ridiculous pest control programme saw sparrows exterminated to protect crops, which only led to more insects, and grass cut down to exterminate insects, only to turn these tracts of land into a dustbowl.

The tragedy is that while the Chinese paid for these experiments with blood, sweat and starvation, some western leftists lauded them as models of the socialist future.

During the Cultural Revolution, the Chinese people had to endure the irony of the septuagenarian Mao Zedong leading a campaign against the "olds": they were expected to believe that he had swum the Yangtze river four times faster than the world record. Mao compared himself with the Emperor Qin Shi Huang, the instigator of the Great Wall, the unifier of China in 210BC, whose burial chamber was guarded by the long hidden terracotta warriors, now viewed with awe by visiting tourists. Yet Mao is best remembered by ordinary Chinese for his slogan "in order to have construction, you must first have destruction". His portrait still gazes down on Tiananmen Square, the scene of the terrible massacre a decade ago, and his body remains embalmed for reverent onlookers in his mausoleum at the heart of the square. Meanwhile his bloody heirs still preside, still repress, still rule. Yet within two years of Mao's death, China under Deng Xioping began to lurch towards capitalism under the guise of a "socialist market economy".

At an otherwise innocuous central committee meeting in 1978, Deng announced the change of direction under the slogan "fording the river by feeling for stones". Since rationalised as gradualism, the bureaucracy thus signalled a limited opening to the market, an aperture which unleashed a wave of class struggle in the countryside. Believing they now had the chance to make money, peasants broke out of their "communes" to produce for profit, going beyond the intentions of the CCP. This process has transformed the countryside, with 200 million clambering out of absolute poverty (defined as $1000 per year), releasing labour for the township enterprises which now generate 40% of China's industrial output. Signalling the collapse of the old "communes" and the danwei, 800 million people now effectively stand outside of the old system of exploitation, only to exchange it for the bondage of waged labour.

In the cities, the harbinger of capitalism has been the foreign investment from old capitalist segments of China, especially from Taiwan and Hong Kong, which invested in Deng's turn from the beginning. The prosperity of the Eastern seaboard has created a labour market and thus further undermined the danwei; market wage rates and prices have replaced state rationing. New housing is either sold or rented at exorbitant cost to tenants.

Out of these processes has mushroomed a 200 million-strong working class. That this is a force of tremendous revolutionary potential is well known to the CCP leaders, who maintain it in an atomised state, denying it the right to form its own legal organisations. Yet, during the Tiananmen demonstrations in 1989, workers' organisation did emerge, and together with the students the workers shook the totalitarian state to its foundations. As capitalism continues to seep into the pores of Chinese Stalinism, the Communist Party continues to lose its grip on the people it oppresses.

The situation is highly fluid. The CCP is still in power. According to dissident Harry Wu, it still has 15-20 million people in labour camps. The army owns 20,000 companies and the state still controls hundreds of thousands of firms. At its last congress, in 1997, the CCP rejected privatisation of the largest enterprises, while agreeing to sell off some of the smallest under a new shareholding arrangements (effectively forced lending). The banking system is insolvent, with $600 billion of loans outstanding: its economists breathed a sigh of relief when China avoided the "Asian flu" financial crisis two years ago.

But the neo-Stalinist state is squeezed from within by the revolution in the countryside and by capitalists from without. Whether the CCP will introduce full-blown capitalism itself, or be swept away by the forces it has unleashed, remains an open question. But in this situation, socialists have to do everything possible to help the Chinese working class play an independent role, to exploit the loosening of the danwei and the turmoil created by the introduction of the market in order to fight for their own interests.

The death of Stalinism in China would be good news. It will not be good if it is replaced by the bastard-capitalism which Russia has endured over the past decade. Far better for the Chinese working class to rediscover the militant traditions of the 1920s, when it stood on the threshold of its own revolution.