Is China heading for a crash?
Rapid economic development over 20 years led some
commentators to claim China could deliver sustained global growth. But it has
started to falter, and risks becoming a destabilising factor in the world. And
the dramatic growth has created vast inequalities within this vast country.
LAURENCE COATES examines the state of the Chinese economy.
CHINA, FOR TWO decades the world’s fastest growing economy,
has become a major force in the global economy. But as the ostensibly
‘communist’ regime in Beijing struggles to put the brakes on an economy which is
experiencing an extreme form of overheating, euphoria among the capitalist class
internationally has given way to nervousness. As Steven Roach, chief economist
at investment bank Morgan Stanley, warns, "the world may be unprepared for the
impact of a Chinese slowdown".
Last year, according to official statistics, China’s gross
domestic product (GDP) grew by 9.1%. For years, independent economists have
viewed official Chinese statistics with scepticism, believing them to be
exaggerated. Today, many believe the figures understate reality – the economy
may have grown by 11 or 12% in 2003. One reason for the discrepancy is that city
and provincial governments are playing down local growth data in order to avoid
penalties from Beijing aimed at reining in overheated sectors such as property,
steel and cars.
Investment in new steel capacity rose by 87% last year and
total output is set to double – again – in two to three years. The director of a
stainless steel mill on the Yangtze river, owned jointly by South Korea’s Posco
and China’s largest private steel company, Shangang, told the Financial Times:
"Do you realise, that in a few years this complex alone will be making as much
steel as the whole of France?"
The steel sector is an example of the uncontrolled expansion
of capacity taking place throughout the economy, much of which is ‘blind’ or
‘duplicative’ according to the government. This is creating huge imbalances:
chronic shortages of electricity, water and raw materials. Blackouts, often
forcing factories to halt production, are commonplace even in the most developed
cities.
Despite huge investment in recent years, road, rail and port
capacity is overloaded. These shortages are being exploited by capitalists and
corrupt officials for huge speculative gains. Shipping costs for freight in
northeast Asia rose by 400% last year on the basis of surging Chinese orders,
with scrap metal, coal and iron ore for the steel industry accounting for half
this sea-borne traffic.
While mining and energy transnationals made bumper profits
from the Chinese boom, other branches of the world economy have been squeezed by
higher prices for raw materials. Just months after President Bush lifted his
controversial tariffs on steel imports, there are calls from US industry for
‘export tariffs’ to stop all the steel leaving the country!
Another 20 years?
IN DECEMBER 2003, Martin Wolf in the Financial Times asked:
"Can China continue to grow at anything close to current rates for another two
decades, or even more? The answer", he added, "is a resounding Yes". This echoes
the prevailing view of the Chinese regime. Recently, however, media comment on
China has struck a more cautious tone.
Signs of overheating are unmistakable: an explosion of
credit; rampant overcapacity (nine tenths of manufacturing goods are in
oversupply); and the return of inflation (2.8% in the first quarter of 2004).
President Hu Jintao, and his prime minister, Wen Jiabao, have assured financial
markets that ‘resolute’ measures are being taken to rein in excessive investment
and engineer a ‘soft landing’ for the economy but, so far, with no discernible
impact.
"China is in a situation of severe over-investment", noted
Credit Suisse First Boston’s Hong Kong office. What’s more, this investment is
chasing diminishing returns. According to The Economist, China currently needs
$4 of investment to generate each additional dollar of annual output, compared
with $2-3 in the 1980s and 1990s.
Ominously, China displays many features of Asia’s ‘tiger
economies’ in the period leading up to their spectacular crash in the summer and
autumn of 1997. Last year, fixed asset investment accounted for an unprecedented
47% of China’s GDP, with the construction sector accounting for half this
figure. By comparison, in 1992-96 fixed asset investment in South Korea,
Thailand and Indonesia averaged 40% of GDP, still extremely high by
international standards. In the same period, Indonesia, Malaysia, Thailand and
the Philippines experienced money and credit growth rates of 25-30% a year.
China’s money supply grew by 20% last year, and bank credit (new loans) by 56%.
The main problem in the case of the ‘tigers’ was that their
exports became uncompetitive on world markets just as this new industrial
capacity came on-line. The sharp rise of the US dollar in 1995, to which most
Asian currencies were linked, priced them out of world markets.
China, although it exports 25% of national output, is less
dependent on the world market. The super-Keynesian measures of the government –
implemented in response to the Asian crisis – to boost demand by slashing
interest rates six times since 1997, and by financing huge infrastructure
projects, have increased the specific weight of the home market. But this market
is chronically oversupplied.
Workshop of the world
CHINA IS NOW the world leader in many branches of
manufacturing, including cellular phones, colour TVs and computer monitors.
Since the start of its global export offensive 20 years ago, manufacturing
industry in China has shifted from low-tech sectors like textiles, toys and
simple manufactures to computers and electronics which now account for 60% of
exports. Reflecting the increased role of high-tech production, China accounted
for 14% of global semiconductor consumption in 2003. Also, perhaps more
surprisingly, 16 million manufacturing jobs have actually disappeared since
1995, as Chinese industry has upgraded its technology. Shanghai Baosteel Group,
for example, the world’s sixth largest steel producer, cut its workforce to
100,000 from 176,000 five years ago.
As industry in the southern and eastern provinces has become
more capital intensive, low-tech production has shifted to the poorer (and
cheaper) inland provinces. This right now is where there is greatest resistance
to government attempts to curb new investment.
China still lags behind the advanced capitalist countries in
the application of new technology, but the gap is closing. A million engineering
graduates leave Chinese universities every year and there is an ongoing transfer
of technology from the huge network of foreign partnerships and joint ventures.
A survey by the Japanese newspaper, Nihon Keizai Shimbun, based on interviews
with 350 Japanese corporations, concluded that, "in the field of technical
development China would catch up with Germany and Japan within ten years".
China’s integration into the capitalist world economy means
that huge swathes of US and European industry are now dependent on components or
finished products from Chinese factories. "In a crisis", warned Ted Dean,
managing director of consultancy firm, BDA, "Chinese labour could become as
destabilising a force for the world economy as oil prices".
Profits squeezed
THESE INDISPUTABLE FACTS are often cited by capitalist
commentators to present a picture of unstoppable economic progress: a 20-year
Chinese boom. This ignores the laws of capitalist economy which, as its
Stalinist centrally planned economy is dismantled, play an increasingly dominant
role in determining the rhythm of the Chinese economy.
The telecom industry is an illustration of this. With 282
million mobile phone subscribers, China is the world’s biggest market. But
growth rates are already slowing, with fewer new subscribers in the first months
of 2004. Overproduction – too many phones chasing too few buyers – has caused
prices to plummet, which in turn squeezes profit margins. The Economist survey
on China (20 March 2004) pointed out: "China has 40 mobile phone makers selling
over 800 models. Annual demand should rise from 80m units to 100m in the next
two years, but supply will double to 200m".
This survey reported from one phone-maker, Bird, based in
Zhejiang province: "Bird’s modern factory is full of industrious workers and
high-tech machines, but Dai Maoyu, Bird’s executive vice-president, looks tired.
The former economics professor says he is making phones he cannot sell, that a
price war is destroying everyone’s margins and that Bird wants to diversify into
cars".
As this report makes clear, ‘modern factories’ and
‘high-tech machines’ do not in themselves mean profits. And what happens when
companies like Bird, faced with falling returns, "diversify into cars" or other
product lines? This only aggravates conditions in these sectors which, in
general, already suffer from overcapacity.
The re-emergence of inflation (rising prices) in China is
mainly due to the rising cost of capital goods, some farm products and services
such as education. A more serious problem, however, is the longer-term potential
for deflation (falling prices) arising from such extreme levels of overcapacity.
Deflation not only squeezes profits, it magnifies the problem of debt, making
repayments costlier in relative terms. This is a potential time-bomb for the
Chinese economy which has financed its investment boom with unprecedented levels
of credit. Nor is this a purely Chinese problem: if the country’s pool of unsold
goods is re-routed onto world markets the result will be a massive injection of
deflation into the world economy.
For years, Chinese labour has been a source of super-profits
for global corporations and local capitalists. Manufacturing wages averaged just
61 US cents (€0.52, £0.34) an hour last year, compared with $16 in the US and $2
in Mexico. One hundred thousand Chinese workers die every year from industrial
accidents or work-related illnesses.
Low wage levels impose severe limits on the growth of a mass
consumer market. Obviously, Chinese workers can only afford to buy back a
fraction of what they produce. The car market, for example, despite sales of 1.8
million units in 2003, is still fundamentally a luxury market. One third of the
cars sold last year cost over $25,000 – 24 times annual urban income levels –
and 70% of these were paid for in cash!
While average per capita incomes have risen rapidly in the
last 20 years, the gap between rich and poor is now the biggest in the world.
This has been a largely urban boom, with average incomes in the cities six times
those of rural ones. Shanghai, with 16 million inhabitants, has the same per
capita GDP as Portugal. But the poorest region, Guizhou, has a per capita GDP
lower than Bangladesh.
Although incomes for China’s 800 million rural population
are now rising due to a rise in prices for farm goods, the Financial Times
pointed out that, "a consumer society has largely failed to materialise among
two thirds of China’s population". Less than half of rural households have
televisions and less than 20% have fridges.
Even in the cities, predictions of hundreds of millions of
wealthy consumers are wild exaggeration. The pressure of migration from the
countryside – with up to 400 million set to move to the cities by 2020 – will
tend to hold down wage levels.
Beijing consensus
THE CHINESE ECONOMY is a peculiar mix of the remnants of a
Stalinist planned economy – the dictatorial rule of the Communist Party –
alongside what James Kynge of the Financial Times called, "a ferociously
competitive brand of raw capitalism". The nearest comparison is the state-led
capitalism prevalent in other East Asian countries like South Korea and Taiwan.
High levels of state investment, in China’s case around four fifths of total
investment, have stimulated industrial development in a way which is unthinkable
in the advanced capitalist economies under current neo-liberal policies. This
year, China is adding the equivalent of Britain’s entire electricity generating
capacity to its generating plant, and plans a similar expansion in 2005. A new
$15 billion natural gas pipeline from Xinjiang province to Shanghai is bringing
cleaner fuel to the coastal areas while being uneconomical from a strictly
‘market’ standpoint. Eighty-six new subway lines are under construction.
These policies, rather than aiming to improve living
conditions for the masses, aim to create a more effective framework for the
exploitation of Chinese labour. In the absence of democratic control of these
projects by workers’ organisations (non-existent in China), waste, corruption
and abuses such as environmental degradation and the forcible relocation of
local communities are legion.
These policies have won admirers within the capitalist class
internationally, most notably Joseph Stiglitz, the World Bank‘s former chief
economist. The term ‘Beijing consensus’ has been coined to signify an economic
model opposed to the IMF’s neo-liberal ‘Washington consensus’. But while this
growth has been spectacular, the crisis of 1997 showed that Asian economies have
not invented a new, teflon-coated capitalism, immune to recessions and crises.
According to prime minister Wen, the Chinese economy has
reached a ‘critical juncture’. Despite a raft of government measures since the
end of 2003, there are few signs yet of any cooling off. Beijing’s dilemma is
that it does not want to be too successful and precipitate a sharp decline or
slump, which is a real danger in the current situation.
The retreat from central planning and the growth of market
forces have limited the scope for government intervention. Government efforts so
far have concentrated on curbing credit growth – total loans are equivalent to
145% of GDP – and property speculation. Twenty-six thousand square kilometres of
farmland – an area the size of Albania – have been turned over to building
developers in the last five years, one of the factors behind falling grain
harvests and rising prices.
In April, the central bank raised the minimum level of
deposits that banks must keep in reserve from 7% to 7.5%. Smaller banks were
ordered to halt all lending temporarily. This has been backed up by police
measures: a crackdown on ‘illegal’ sales of farmland, and beefed-up
environmental and other controls at new factories and construction sites.
But these measures are being thwarted by alliances of
capitalists and corrupt local officials who want to shield their own areas from
cutbacks. China’s banks, despite being state-owned, are described as
‘multi-storey’ in that regional and local offices enjoy a wide degree of
autonomy. The Economist commented: "Branch managers often have closer ties to
local officials and businessmen than to their own bosses, which breeds
corruption".
This goes a long way to explain why investment in property
continued to grow at the explosive rate of 41% in the first quarter of this
year, according to the national bureau of statistics. Housing construction in
China is overwhelmingly pitched towards the luxury market and, again,
overcapacity in the form of vacant properties is rife. Still, property prices
rose by 25% last year and are approaching US levels in cities like Shanghai and
Beijing. This points to the danger of a crash in land prices which, in turn,
could trigger a banking collapse. China has "the weakest banking system of any
large economy", in the words of the Financial Times. Bailing out the banks could
cost as much as $500 billion or 30% of GDP.
Currency peg
IT LOOKS AS if the government will soon be forced to bite
the bullet either by raising interest rates, for the first time since 1995, or
abandoning the renminbi’s peg to the US dollar. That both options have been
under discussion for some time indicates how reluctant the government is to move
on either front. Higher interest rates would be the most effective way to regain
some control over credit levels and investment, but the results may be too
dramatic. By encouraging people to save, and making consumer loans more
expensive, this could undermine consumption at a time when the opposite is
sorely needed. A rise in interest rates will also aggravate the banks’ problems
with ‘non-performing loans’ which, according to official estimates, are
equivalent to 20% of GDP. Some economists believe the figure is closer to 40%.
Yet another problem is the huge sums of so called ‘hot
money’ – around $12 billion a month – which is pouring into China as foreign
banks and hedge funds bet on an imminent rise in the renminbi (yuan). Higher
interest rates could trigger even bigger speculative inflows which, as the
experience of the ‘tigers’ showed, are highly destabilising.
Revaluation of the renminbi is not a painless option,
either. On the plus side, it would ease inflationary pressures, cheapen imports
of raw materials, and perhaps postpone the need for a rise in interest rates by
putting the brakes on some forms of investment. It would also help to cool trade
tensions with the US, China’s biggest export market.
But the risks are considerable, not least because the
central bank may not be able to control the currency’s rise once the present
dollar peg is abolished. Exports would suffer, as would foreign direct
investment, but the financial system, too, could be placed under new pressures
from speculative assaults on the renminbi. The global effects would be
considerable, especially if China was forced to begin selling its massive
foreign exchange reserves, worth $440 billion in May 2004, which have helped
finance the twin deficits (Federal budget and balance of payments) of the Bush
administration in the US.
More than anything, the regime fears ‘political
instability’, and a movement of the working class. Literally every day there are
labour protests somewhere in China, though mostly, at this stage, among
unemployed workers, laid-off from the state sector. These movements have so far
been isolated, local outbursts, which have been defused by a combination of
concessions and repression from the authorities. The most famous protest in
recent years led, briefly, to the formation of an independent trade union among
workers in Daqing and Lioaning, north-eastern China. Two of the leaders of this
movement, Yao Fuxin and Xiao Yunliang, are now serving long prison sentences.
Given the now pivotal role it plays in the global economy,
it is clear that any re-run of the Asian crisis in China, would have major
international implications. Even a soft landing, resulting not in a slump but in
a more ‘normal’ rate of growth (say, 4-5%), would be a body blow for Asian and
world capitalism, not to mention China’s ‘stability’. The Economist survey
concluded that a slowdown "carries with it the risk of massive job losses and
social upheaval, recalling the days of the Tiananmen protests in 1989". This is
the spectre which haunts the Chinese regime and its friends and supporters in
global big business.
China & the world economy
ALTHOUGH IT ACCOUNTED for just 4% of world GDP last year,
making it the sixth largest economy in dollar terms, China’s role as the number
one market for capital goods (minerals, fuel, building materials and machinery)
made it the main locomotive of global growth. World GDP grew by 3.2% in 2003,
with China contributing a third of this growth, or 1.1%, while US capitalism
accounted for just 0.7%.
China’s role within Asia, the only region of world
capitalism experiencing strong growth, is now crucial. In 2003, it accounted for
70% of Japan’s total export growth, and 40% of South Korea’s (Asia’s first and
fourth largest economies respectively). By surfing the Chinese wave, Japanese
capitalism recorded its highest ever level of exports in the first quarter of
2004. This export boom is the main factor behind the current upturn in Japan’s
crisis-torn economy, which has seen GDP growth exceed 5% (annualised) for the
last two quarters.
Last year, China became the world’s third largest importer
after the US and Germany. For the first time since 1993, it is heading for a
trade deficit in 2004 (with imports exceeding exports on an annual basis). The
surge in Chinese demand in 2003 drove world prices for industrial raw materials
up by 73%. China consumed half the world’s concrete output, a quarter of its
steel and one third of its iron ore. China is the world’s biggest steel
producer, accounting for one fifth of global output in 2003 (220 million tonnes)
– as much as the US and Japan combined.
In 2003, China also became the world’s third largest market
for motor vehicles with sales growing 60%. But here too, capacity growth is
outstripping demand. Driven by herd mentality (a fear of being left behind),
transnationals like GM, Volkswagen, Toyota and Honda have stormed into the
Chinese market, announcing more than $20 billion of new investment in 2003. By
2007, capacity is forecast to reach 15 million vehicles, against sales of 7
million. In this case, China’s pool of unsold cars would be greater than the
entire Japanese market (6 million cars per year).
Already prices are falling. While steel prices rose 35% in
the twelve months to February 2004, car prices fell 5.1%. Fierce competition
between car-makers makes it impossible to pass on rising costs to consumers, so
profit margins are falling.
Its share of world cotton consumption rose from 25% in 1999
to 32% last year, reflecting the predominant role of its textile industry. It
consumed one third more refined copper (20% of the global total) than the US,
reflecting the explosive growth of telecoms. A similar picture emerges in
category after category.
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