By Kumar David –
The economic downturn in China is serious, but different from global capitalism in the way it is unfolding, how the state is responding and in its medium turn prospects. Obviously they influence each other but it is different because the structure of the Chinese economy does not replicate Western capitalism. It is partly capitalist and partly state owned; it is a duck-billed platypus, neither mammal nor bird as I often say. Central and regional governments drive domestic decisions while the external economy is swayed by import-export markets and the fortunes of the yuan in currency exchanges. The market (household spending and property development) do have an impact – as does pervasive corruption – but the Centre dominates with directives and giant infrastructure projects. Provincial governments too invest heavily, and direct enterprises. Central control of banks is tight. Laissez faire capitalism does not lead the economy; the writ of Party and bureaucracy, not markets, runs. The state-cum-capitalist domestic economy is characterised by two words, Control & Balance.
It’s a different story in the external sector; when China’s exports have a hard time, imports also nosedive pushing global mineral, raw-material and oil producers into a spin. If confidence loss leads to capital flight and servicing central, provincial and corporate debt due to past overinvestment creates debt servicing pressure, the value of the yuan dips. China’s (mainly domestic) gross debt is 300% of GDP; too large to inflate away despite a deflationary global environment. This portends rising central and provincial government deficits.
For two decades the country has been the workshop of the world but Vietnam, Mexico, South Korea, India and others are gaining ground and competition is intensifying. Manufacturing, the heart of the economy, is contracting. Partly for this reason, and more significantly to placate stirring class pressures at home, the Party has been compelled to do the obvious; make a transition from investment led expansion to consumption geared development. China is in the throes of a transition from a mad investment and industrial export-driven rush to a domestic consumption oriented paradigm. So far consumption accounts for only 35% of output in China compared to 70% in the US.
This complex of interlinked factors (downturn in external trade, overinvestment in bricks, concrete and Megawatts, downward pressure on the yuan, bureaucratic blunders in dealing with stock-market hiccups, false starts in monetary policy and stubborn corruption still not fully tamed) is the nexus that is working its way through the ‘body economic’. Inevitable in this transition is slower growth. Bloomberg’s tracking is shown in Chart 1 but some analysts say growth in the next five years could be sustained at below 6%. Factories are cutting back and unemployed worker-protests are on the rise; the state is locking up activists in numbers. The Party’s honeymoon with the middle class (25% of the population), premised on rising prosperity, is under stress. President Xi is turning out to be a harsh authoritarian in dealing with criticism both within and outside the Party.
Rather a lot is being made of the government’s ham fisted intervention in the Shanghai and Shenzhen stock-market debacles in August 2015 and January 2016. State owned companies and banks were prohibited from selling stock when the market nosedived, some were pressed to buy more and support the market. The People’s Bank (PoBC), the central bank, is trying its hand at Chinese style QE and has pumped about $100 billion equivalent of yuan into the economy. Panic responses buttress my point that the system is not a market economy and the authorities are unschooled in dealing with the capitalist sector. Gridlock in the economy runs deeper than just blunders; the limits of an economy based on raising exports into contracting global capitalist markets and burgeoning investment in state and capitalist sectors has been reached.
The Yuan is no yawning matter
Not many people pay attention to the world of the yuan; its only GDP growth and import-export that economists and laymen have focussed on in the past. The realisation is now dawning that ‘Yuandom’ is important for both the domestic sector and the big impact that China has on the world. (The yuan was called Renminbi – RMB – in its foreign transactions but dual exchange rates are long gone). The yuan declined from August 2015 due to economic slowdown and strengthening of the dollar. It is, fortuitously, happening at the same time that China is orchestrating an internationalisation the yuan.
For years the yuan sustained a loose link to the dollar and when the latter appreciated it too floated up contributing to declining exports and enhancing the competitiveness of trading rivals. So the State Council (Cabinet) and PBoC gently pressed it down; but not without severe complications. Devaluation makes debt servicing of hefty foreign loans of Chinese companies onerous in yuan and in the face of slowdown leads to loss of confidence and capital flight. Though China has $3.4 trillion in foreign reserves – a lot of money – they fell by $450 billion (13%) in 2015. Current international commitments are huge – New Silk Road, Asian Infrastructure Investment Bank and aid to African countries – the falling reserves therefore are not inexhaustible. Tightening these commitments sends negative psychological signals internationally; the leadership is loath to do that.
China is the largest gross exporter in the world (larger than the EU and 45% larger than the US). As an importer it is 15% behind the US and EU but catching up fast and is expected to be the world’s largest importer by 2020 unless the present crisis derails things. The point is this; if China catches a cold (imports less) the rest of the world gets pneumonia. Conversely a lower yuan (a more competitive China) will drive Japanese, South Korean and even German and US exporters to the wall.
Chart 2 shows the percentage of exports of different countries going to China; mining is already in shell-shock in Australia, Brazil and in small African economies not shown in the chart. Saudi and Indonesian oil and Russian gas are less in demand; Japanese, South Korean, German and US exports of high-end technology to China are declining. The BoJ recently introduced negative real interest rates for bank deposits with the central bank hoping to compel them to lend, but what can Japanese banks do if companies, discouraged by declining Chinese demand, won’t borrow?
Trouble in the Middle Kingdom spells peril all-round though China is not even a capitalist market economy integrated into the global financial system, but only linked by trade. Nor is it foreseeable that China will open its capital account to international markets; caterwauling by the world’s bourgeois economists, whose political naiveté is hilarious, notwithstanding. The point is this: globalisation as a process is stronger than global capitalism as a system. The name “socialist market economy” is no oxymoron as I argued in year 2000 in China’s Socialist Market Economy; Oxymoron or Viable Concept, a longish paper that has stood up surprisingly well across a decade and a half.
China is committed to the expansion of social security, education, and healthcare and pledged to end poverty and upgrade power plants to high environmental standards. The strategic standoff with the United States and China’s outrageous territorial ambitions in the South China Sea are surfacing in the midst of an economic slowdown and commitment to middle-income living standards for all. What will give? One good thing will be if generals and admirals are told that there is no cash for aircraft carriers, submarines and satellites. This though unlikely is possible for two reasons.
The Chinese Communist Party is the fount of power; the military dare not challenge it and insubordinate generals are sent packing sans notice. Party control of the PLA runs deep and its ideological supremacy is absolute. That’s for two; one is historical, reaching way back to leadership of the revolution and second and more recently pulling 300 million people out of poverty. One-party rule is secure for now. [This is different from PM Ranil Wickremesinghe’s limits; if BBS, Sina Le etc run wild can he send the military after them? Would that not be the opening that Gota’s chauvinist rump is waiting for? Ranil lacks anything like the CCP’s unquestioned remit over the PLA].
The second reason is that China can only resolve its constraints and overcome its deficits by dramatically increasing taxes on its wealthiest and most powerful classes. Brazil, Mexico, and Russia did not do so; they could not! This is where I finish as I started, China’s is neither a capitalist nor an entirely state economy; relations of class power and ideological influence are different from Brazil, Mexico or Russia. The Party, if it so decides, can push through big income restructuring. Will it? That needs grassroots mobilization; the Party has the ability to mobilize the masses but President Xi jin-ping doesn’t look the type to do it. I am no Mao fan, but it takes Mao-type ideological clout to kick off revolutionary realignment. The class and objective forces exist but what old Plehanov called “the role of the individual in history” does not. That’s another long theoretical story for another day.