Heading for a crash?
Michael Roberts comments on the speculation surrounding China’s latest growth figures
Last weekend, the People’s Bank of China announced a cut in its benchmark interest rate to just over 5%. This was the third rate cut since last November. The government is clearly worried that the powerhouse Chinese economy is slowing down so much that it is threatening its ability to provide enough jobs and incomes for the people still flooding in to the teeming cities. A failure to deliver on growth and jobs would put into jeopardy the rule of the Chinese elite.
China’s economy is now growing at its slowest rate since the end of the global financial crisis and the great recession in 2009. On official figures, first-quarter growth has slowed to 7% year on year from 7.3% last quarter, and most unofficial estimates reckon growth is really even slower. And it used to be a benchmark that China had to grow at 8% a year to absorb the expansion of the labour force from rural areas into the factories and cities. For behind China’s impressive economic rise has been the biggest human migration in history. By 2013, some 269 million rural residents had become migrant workers in cities, offering cheap labour and sustaining urban growth.
The slowdown is particularly visible in the industrial sectors. Value-added industrial output, a measure of manufacturing production, has hit financial-crisis levels. Industrial production grew by 5.6% year on year in March - far short of economists’ expectations of 6.9% .
And the consumption of goods has also slowed. Retail sales rose 10.2% in March. That sounds a lot by the standards of the major capitalist economies, but it is a slower rate than during the financial crisis.
Above all, the crucial driver of growth - fixed-asset investment, which measures money put into big projects and factories - rose 13.5% year on year, down from a peak of 30% back in 2009, if still at a higher rate than in the early 2000s.
The slowdown is partly a result of the sluggish recovery in the world economy in Europe, Japan and the US - the main destinations for Chinese exports. But it is also the result of a deliberate policy by the government to rein in a huge property bubble that has ensued since 2009. This was driven by low interest rates, huge savings held by richer Chinese and local governments borrowing or selling land to build homes and cities for the burgeoning urban population.
Chinese banks searching for profit and corrupt local government officials have engaged in a massive property bubble. The result of this has been a rise in debt, both in the public sector concealed from the books by local governments and among property developers. Debt is now 282% of GDP, according to McKinsey - a higher rate than in the US.1
With the property market now being reined in, richer Chinese have switched their speculation into the stock market. The Chinese stock market has exploded. But it has done this before. Between 2005 and 2007 it rose 800%, only to collapse during the global financial crash. This time it is up only 200% - it may have further to go.
China’s property and stock market bubbles show that the great expansion in industry and investment over the last 10 years has not been equally shared. During that time inequality of income and wealth has risen more than in any other major economy and China now has a Gini coefficient (a measure of inequality) over 40 - as high as in the US and higher than most major capitalist economies.
There is massive offshore evasion of tax and the hoarding of secret bank accounts by China’s super-rich - yet again revealed in the leaked reports about the ‘Chinese princelings’, among others. More than a dozen family members of China’s top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents have revealed. The brother-in-law of China’s current president, Xi Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the political relations making use of these offshore havens.2
Indeed, while the world marvels at the rise of Chinese stock prices, money is quietly leaving the country at the fastest pace in at least a decade. Louis Kuijs, Royal Bank of Scotland’s chief China economist, estimates that China lost $300 billion in financial outflows in the six months through March. Deltec International, a Bahamas investment firm, puts the figure even higher. This expresses the fear of the Chinese elite over the anti-corruption campaign being waged by the Communist Party leaders and also the fear of foreign investors that the credit bubbles will burst and China will have a ‘hard landing’ similar to that in 2008 for ‘western capitalism’.
With $3.73 trillion in reserves, China is in no danger of running out of money. But mainstream economics is confused about which way the Chinese economy is going. Some media and economists reckon that China is heading towards a major crisis or slump brought on by ‘overinvestment’, a reversal of a credit-fuelled property bubble and a spiralling of hidden bad debts in the banking system. On the other hand, some economists reckon that the Chinese authorities will be able to engineer a ‘soft landing’ through the easing of credit and financing of the writing-off of debt from cash reserves built up over past years.
Behind this debate on the immediate future also lies a debate on whether China can continue to grow fast through investment in industry, infrastructure and more exports, or will need to switch to a consumer-led economy that imports more and supplies goods to a ‘rising middle-class’ like advanced capitalist economies supposedly do. Mainstream economics reckons that this cannot be done without developing a more ‘market-based’ economy - ie, capitalism - because the ‘complexity’ of a consumer society can only work under capitalism and not under ‘heavy-handed’ central planning of government and state industries.
In my view, this misunderstands the nature of the Chinese economic beats. Looking at the decisions of the recent Chinese Communist Party’s Third Plenum explains things better.3 The plenum issued a detailed statement on what the elite has agreed to do about China over the next five to 10 years.4 It did not commit to anything like ‘free market’ capitalism. At best, it agreed to a few limited steps towards the development of market forces in banking (more competition for the state-owned banks) and in agriculture (some commercial property transactions), vague talk about ‘liberalisation’ of capital controls and currency trading down the road; a few more ‘free trade zones’ for foreign companies to ply their trade; and allowing foreign companies to operate in more service sectors. And, of course, there is going to be a very limited relaxation of the terrible one-child policy for families and the control of the movement from rural areas of people into the cities (hukou) by allowing more free movement into smaller cities.
But that is it. Two things stood out that did not happen. There was no change in the general philosophy of ‘socialism with Chinese characteristics’ and thus the maintenance of the dominance of the state sector. The pro-capitalist elements in the Chinese elite have pushed for the implementation of the proposals in the large World Bank report on China.5 The bank’s first and foremost demand for ‘reform’ was the privatisation of the state enterprises. The Third Plenum made no move in that direction whatsoever. The other clear message was that there would be no more democracy, such as giving control of even local legal systems and decisions to the people. On the contrary, the leadership is setting up even more repressive state security services to monitor and control the population and curb any dissidence.
So there is nothing really in the aims and policy proposals agreed by the Chinese political elite that changes the nature of Chinese economic, social and political model. The majority in the leadership will continue with an economic model that is dominated by state corporations, but directed at all levels by the communist cadres. Markets will not rule and the law of value will not dominate prices, labour incomes or domestic trade. Of course, the law of value does operate in China, but mainly through foreign trade, capital flows (investment) and currency movements, but even here it is under strict limits, with only gradual moves to relax those limits.
Can the elite continue with this ‘halfway house’ without provoking either a crisis and slump that will force them to follow the ‘capitalist road’, as the World Bank and the pro-capitalist elements want? Will the elite face an eruption from below, as the fast-growing, working class, urban population starts to flex its muscles for a say in running society?
Well, I think not - at least not yet. The International Monetary Fund seems to think that China’s trend growth rate is declining gradually to only about 6.3% by about 2019. Others are more pessimistic. The US Conference Board forecast this week that trend growth after 2020 would be only 4% a year. But even these forecasts recognise that China will continue to grow around 7% in annual real GDP terms for at least another five years. The working population is still growing, although it will peak around 2020; there are still hundreds of millions of rural workers and peasants to be incorporated into the industrial machine; and China is increasingly sucking up as much of the world’s raw materials as it needs to sustain its expansion.
John Ross of Shanghai University has pointed out that China’s industrial growth remains truly staggering:
On World Bank data China’s industrial production in 2007 was only 60% of the US level, whereas by 2011 it was 121%. Therefore in only a six-year period China has moved from its industrial production being less than two thirds of the US to overtaking the US by a substantial margin. In six years China’s industrial output almost doubled, while industrial production in the US, Europe and Japan has not even regained pre-crisis levels.6
The great Chinese economic ‘miracle’ is not exhausted quite yet.
Michael Roberts blogs at https://thenextrecession.wordpress.com.
1. The McKinsey Institute, ‘Debt and (not much) deleveraging’, February 2015.
2. This is the latest revelation from ‘Offshore Secrets’, a two-year reporting effort led by the International Consortium of Investigative Journalists (ICIJ), which obtained more than 200 gigabytes of leaked financial data from two companies in the British Virgin Islands, and shared the information with The Guardian and other international news outlets. The documents also disclose the central role of major western banks and accountancy firms, including PricewaterhouseCoopers, Credit Suisse and UBS in this offshore world, acting as middlemen in the establishing of companies. Between $1 trillion and $4 trillion in untraced assets have left China since 2000, according to estimates (www.icij.org/offshore/leaked-records-reveal-offshore-holdings-chinas-elite).
5. World Bank China 2030: www.worldbank.org/en/news/2012/02/27/china-2030-executive-summary.