4 December, 2020

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China’s Man-Made Economic Travails

By Kumar David

Prof. Kumar David

Prof. 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.

China’s GDP growth 2007-2015This 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’s global economic impactChina 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.

What next

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.

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Latest comments

  • 0
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    No comments from Yahapalana suckers although one of their good Professors has taken time out to explain Economics and bag the Chinese GDP growth.

    Chinese GDP last year was 10 Trillion USD. US was 17 Trillion.

    China has USD 10 Trillion in FX , In contrast US owes 15 Trillion most of which is Chinese reserves.

    China is growing at 7 % still despite the Professor’s downgrading. although that 2 % drop has f******* the Minerals exporting Economies.

    US is pushing to reach 3 % even with borrowings totaling 1 Trillion every year.

    You don’t need to be a Yahapalana Professor to do a Model to to work where these 2 Nations would be in 10 years.

    To make it more simple for the Yahapalana followers, that is when Bodhi Sira leaves the Presidency.

    But the Yahapalana PM kicked out the Chinese and wants to borrow from the US.

    US has to borrow from a third party to help the Yahapalana PM, and the US can keep a commission too, like the Mortgage Brokers.

    Meanwhile Yahapalana President is begging MS Merkel in Deutschland and her Austrian cousins to help.

    They can’t even bail out or they don’t want to help their own in EU, the Greeks who are somewhat like our Sinha Le with over 2500 year history.

    Will they help Batalanada PM?.

  • 0
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    What is Prof. David trying to tell us? Is it about the Chinese Economy it self? The alleged weaknesses in China did exist when it was “growing positive” why now attribute them to the downturn? We have a habit of describing economic activity only taking parts of it and subject it to some analysis to describe the incremental changes it can take place. Perhaps Prof David, as one who has done electrical engineering is well aware that the relationship between various parameters which can have partial derivative operators in the matrix. Economics can best be described by all the applicable equations that could govern the economy of the country, though no text is availed of it. Only an economist with the mathematical skills of the Davidian type may attempt to do so. Prof David could definitely attempt to formulate the quantitative relationship between various economic parameters for the benefit of the world rather than describe various aspects of a qualitative story of economics in a given territory.

    • 3
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      Engineer-in-Economics,

      The great financial crisis of 2008/2009 has given the lie to Robert Samuelson’s quantification of economics, which much of the economic profession relied on. You can’t make a hard science out of a dismal social science. It is today a case of the blind leading the blind. Paul Krugman writes frequently about it.

      Look at the Nobel committee’s decision to grant the prize to both Eugene Fama and Robert Shiller; the former said that markets are ‘efficient’ and the latter essentially said ‘no, they are not.’ In the other words, the committee gave awards to both the thesis and the anti-thesis; does anyone need anything more to claim that it is “the blind, leading the blind.”

      • 1
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        Agnos,

        You are right when you say that “You can’t make a hard science out of a dismal social science”. How people demand is the social part of it and it cannot be quantified with ease. The drive to suplly that demand is another story meeting with almost the same difficulty of quantifying. But there are the averages and the average behaviour. Example say about 35% of the people want to have fuzzy drinks and that is a quantified statement.

        My plea to Prof David is to use his analytical skills which is only known to say his students and not us the readers of newspapers and try to do which no one dared to do. If he does so, somewhat successfully, then he is a hero.

  • 0
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    Sorry, I meant Paul Samuelson, not Robert Samuelson.

  • 0
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    Economics and Reactive Power

    Kumar, your knowledge of economics is even more dismal than your knowledge of reactive power. Perhaps you are trying to cover up that with what you think is humor. But my Guru, I was yawning like the Yuan all the way. And What Next? I fell asleep of course.

    You never taught us much about electrical engineering. Only blackboard full after blackboard full of CEB generation data.

    Those days, you were tall, lean, dark and handsome and that brown moustache added much to your looks. I can still vividly remember you bending down and looking at some papers and writing at the bottom of the board as it became full of useless data. Bending down like that was a highly dangerous maneuver but we were too decent to make use of it. And in my old age I regret that.

    Just watch or read one of the Feynman lectures. That is what I call teaching.

  • 0
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    Analysis and Predictions

    If you cannot stomach science please bypass the next section and go to Predictions in Pseudo Sciences like Economics:

    Predictions in True Science:

    In science one can formulate theories and then make predictions. The proof of the pudding is not the theory but the predictions made based on it.

    One of the best examples of such a fantastic prediction is the Supernova 1987, which occurred in the neighboring dwarf galaxy called Large Magellanic Cloud (168,000 light-years away) in 1987. Super Novae occur at the end of the life of massive stars, and are unimaginably huge explosions. They are very rare and to have one in a nearby galaxy was extremely rare. Only 3 have occurred in our galaxy in the last 1000 years, the last one in 1604.

    This means that since the coming of age of astronomical sciences no supernova had been observed in our galaxy or nearby. Thus the theory of how a supernova occurs, what triggers it, what is the end result is, what an observer is supposed to see etc. had to be based purely on theories. Using computer simulations, it was found that a supernova explosion would be preceded by a massive expulsion of neutrinos by the star a few hours before the main explosion. Obviously, the theory could not be verified by observation until a supernova occurred close by.

    In 1987 it happened. There was a sudden and massive increase in neutrino flux as detected simultaneously by 3 neutrino detectors on Earth. The supernova hunters went in to action looking for the supernova. 2 or 3 hours later the light from the supernova was detected in Large Magellanic Cloud. Note that light travels faster than neutrinos but they are emitted a few hours before the main explosion as predicted by the theory.

    Predictions in Pseudo Sciences like Economics:

    Kumar asks us, What will give?. I was waiting with a lot of anticipation what he is going to say there. It was a fruitless wait. Instead of giving the tired readers the predictions he is asking us questions like, What will give? Will it? What will the party do? I could not find a single prediction about the economy there, only questions as in one of his BS exam papers.

    Then I remembered my Peradeniya days. Kumar was very good in asking questions and very miserly in answering any. If you ask him a question he would answer back with one of his own. And if whenever he answered , which was as rare as a blind Sea Turtle seeing the full moon through hole in a stand of hay (a Sinhala saying), it was confusing or wrong most of the time.
    I think he is keeping to the adage: If you cannot dazzle them with brilliance mesmerize them with BS. (and when I say BS I don’t mean Bachelor of Science).

  • 0
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    I was about to say this man is talking absolute rubbish, but then realised all the comments said the same.
    I think CT should vet articles instead of just publishing someones crap.

  • 0
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    An Engineering turn Trotskyist of LSSPs that anti -Marxist politics back by unknown “socialism” of Capitalist agents , which are sugar coated bullets in bourgeoisies politics of western turn frustration of David ; are its loss of power western hegemony by politics of David been that spoken for the voice of Imperialist Masters.

    This movement is spreading from day to day the China People’s Republic daily gain in strength of her economy power and political stability. That is why the US Bourgeoisie and monopoly class have taken an entirely different attitude of matter of Global Economy progress.

    Now US subprime crisis and European debt crisis destroy that western confidence of Global economy ,now that axe is about to fall on Global Capitalism ,there can be no question at all of any independent for big bourgeoisie and their parties. US Imperialism provide the most glaring example.US seems to show most democratic country ,it is a great democratic social republic.

    Where else ,if not in that country -US –which has all the elections rights and all the rights of a free state ,could we except correct solution to all legal and democratic questions?
    Yet we know what happen to Black men there, in the democratic republic; blacks men and women was tarred and whipped until his blood flowed in the dust. This took place in a free country in a democratic republic. This was happen in black President Obama allowed by ‘humane’ ‘philanthropic’ of US in centre of power.

    What are these President Obama now doing with Iraq, Afgestain, Libya Syria, ,Iran ,Yemen republic and Egypt many defeated countries?
    The picture of world relation are display before US in full view!
    We see substance of what the US offer their friends from these pictures which carry such overwhelming conviction. US has proven would have instantly Proved our point of US anti-Globalization and anti-democratic point.

    These US politics of democracy the multi-billionaires the “most human” people in the world would have instantly broken their friends habit of talking even of dreaming of an Independent and Democracy in any form.

    We should have squarely put before you alternative David; either David stand for Imperialist system headed by USA or you stand for Chinese People’s Republic. David would have said do this because we say so, we your friends, the USA, British, EU countries and Japan the Obama and local UNP political friends.

    David there can be no middle road of economic course once it is a question of protecting US and Western vital interest on one hand ,and once the Chinese People Republic has found it ways on the other hand. It is absolute clear to everyone that China path of Socialism has entered the period of its realization.

  • 0
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    AKD’s articles
    [Edited out]

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