27.10.2022

Cold war set to heat up

Michael Roberts expects a turn to self-reliance, urges less reliance on the capitalist sector and calls for democratic planning

China’s Communist Party congress took place from October 16-22 - an important event not only for China, but globally. The western media concentrated on the fact that Xi Jinping was confirmed for an unprecedented third term as party leader and will thus also continue as president of China when the national congress meets next March.

Naturally, the western pundits were strongly opposed to Xi having a third term. The Financial Times’s Keynesian guru, Martin Wolf, reckoned Xi’s continuation in power would be “dangerous” for China and the world:

It would be dangerous even if he had proven himself a ruler of matchless competence. But he has not done so. As it is, the risks are those of ossification at home and increasing friction abroad … Ten years is always enough. It is simply realistic to expect the next 10 years of Xi to be worse than the last.¹

And, apparently, that has been bad enough.

The antagonism to Xi and the current leadership is less to do with the lack of democracy and one-party rule in China - western pundits and international agencies seldom mentioned that in their past analyses of China before Xi took over. The strong antagonism now is really to do with two things:

(1) under Xi, China’s economic policy has emphasised state control and a reduction of the sway of the capitalist sector;

(2) under Xi, China is resisting being contained and squeezed by US imperialism in its escalating attempt to stop China’s progress as a major rival in trade, technology and global influence.

When it comes to the current state of China’s economy and its future prospects, analysts (and especially those based nearby in Hong Kong, Taiwan, etc) veer from reckoning that the Chinese economy is about to implode, under the weight of record-high debt and a property bust, to long-term stagnation due to demographics, the lack of consumer demand and slowing productivity growth, induced by Xi’s bias towards the state over the market.

For decades, such analysts have been predicting China’s demise and collapse under the weight of rising debt and state control. That has not materialised. Now the main emphasis is on arguing that China can no longer expand its national output at any reasonable pace and will not be able to get out of what is called the ‘middle income trap’ and so meet the needs of an urbanised population - unless it breaks with its state-led economy and allows the capitalist sector to flourish to meet the consumption demands of the burgeoning middle class.

Slowdown

But is this view of China’s economic future any more accurate than the one adopted for the last two decades that China was about to implode? First, what is the current state of the economy? For the first time since the 1990s, China’s real GDP growth this year and next is likely to be lower than the average growth in the east Asian region. This year, it will probably be under 3% and next year about 4.5%. That is well below the long-term target of about 5% a year.

Why is this? There are two reasons. The first is the impact of Covid and China’s ‘zero Covid’ policy. The west never had such a policy and eventually just relied on vaccinations to overcome the worst of the impact on lives and health. But the virus in various forms continues to spread across economies, delivering yet more deaths and, above all, lingering ‘long Covid’ illnesses that have stopped millions working. China rejected this ‘open up the economy’ approach. Instead, it imposed strict and drastic lockdowns at the first sign of infections picking up and is still doing so. The government was not prepared to repeat the disaster of the first eruption in Wuhan. As a result, China has had the lowest death rate from Covid in the world.

The Chinese Centre for Disease Control and Prevention warned that, if the country followed the opening-up strategies taken by countries such as the UK and the US, it would cause hundreds of thousands of cases a day, of which more than 10,000 would present severe symptoms if there was a sizeable community outbreak.

A key reason that China adopted lockdowns as well as vaccinations was its relatively weak public health service and the lack of the latest, most effective MRNA vaccines. There is a patchy network of poorly-resourced hospitals and a huge elderly population at higher risk of severe illness, as well as the comparatively low efficacy of its domestically produced vaccines. While there are more hospital beds per capita in China than in the US and the UK, the number of intensive care beds available - crucial to keep Covid-19-infected patients alive - is a quarter of the OECD average. Resources are especially thin outside the big cities: rural areas have half the doctors and beds per capita of urban areas.

But China opted to save lives over economic expansion. Of course, western analysts claim that the ‘zero Covid’ policy had more to do with an autocratic regime controlling the population - yet most opinion surveys in the past have shown broad support for the policy among the population, although it is true that ‘lockdown fatigue’ is beginning to have an impact, mainly because there is no democratic decision-making on health policy, which is simply imposed from above.

The other reason that China’s economic growth has slipped this year is the general slowdown towards a slump in the rest of the world. The major capitalist economies are stuck in supply-chain congestion, weak investment expansion and now rising interest rates and inflation that threaten outright global recession. The World Trade Organisation reckons that total exports and imports of goods are likely to grow by just 1% in 2023.

The most recent World Bank projections put China’s GDP growth for the year at 2.8% - down from its initial forecast of 5% and well below the rest of Asia. But China is not heading into a slump like the G7 economies. Indeed, both the World Bank and the International Monetary Fund expect China’s real GDP to rise by over 4% next year, while most G7 economies will be contracting or have near zero growth.

Looking longer term, western analysts reckon China is heading for much slower growth and this will threaten Xi’s future. Up to now, China’s unprecedented economic growth record has been based on high investment rates and exports of manufactured goods to the rest of the world.

But the Covid slump and the dissipating global economic recovery has hit exports hard. They fell in dollar terms by 1% in the year of the Covid slump and then rose sharply in the 2021 global recovery year by 21%. But in the first eight months of 2022 exports are down to 7.1% year on year. As a result, industrial production has risen only 3.6% and retail sales 0.5%. Fixed asset investment has remained stronger at near 6% year-over-year, based on increased infrastructure investment.

Analysts are claiming that China will now enter a period of low growth and will not escape the ‘middle income trap’ that so many so-called emerging economies are locked into. It will not catch up even with the GDP level of the US as previously expected. This claim is based on two assumptions. First, that China’s ageing population and declining working-age sector will reduce growth rates and, second, that the high-saving, high-investment model of Chinese growth no longer works.

Longer term, the IMF forecasts that China will grow at a subdued rate of 5% a year. But that rate would still be more than twice that of the US, and more than four times the rest of the G7 - and that is assuming no slump in the G7 economies in the next five years.

The other argument is that China cannot grow at any reasonable pace unless it switches from a high-savings, high-investment, export-oriented economy to a traditional consumer-led capitalist economy, as in the US and UK. The usual basis for this view is that personal consumption rates are too low in China and this will hold back demand-led growth.

For example, take this view by Chen Zhiwu, a professor in Chinese finance and economy at the University of Hong Kong. Chen argues that, under Xi, major reforms towards a private-sector, consumer-led economy have been sidelined. “The 60 reforms would have largely expanded the role of consumption and private initiatives,” he says. “However, the market-oriented reform agenda has been largely sidelined ... resulting in a larger role for the state and a shrunken role for the private sector.” According to Chen, this will mean China’s economy will now stagnate.

Another prominent and widely-followed western analyst, Michael Pettis, who is based in Shanghai, makes a similar argument: namely that what will push China into Japanese-style stagnation is the failure to expand personal consumption and continue to expand investment through rising debt. It is no accident, in my view, that both these analysts come from the finance sector.

Yet how can anybody claim that the mature, ‘consumer-led’ economies of the G7 have been successful in achieving steady and fast economic growth, or that real wages and consumption growth have been stronger there? Indeed, in the G7 capitalist economies consumption has failed to drive economic growth and wages have stagnated in real terms over the last 10 years, while real wages in China have shot up.

This is the real point. Consumption is rising much faster in China than in the G7, because investment is higher. One follows the other; it is not a zero-sum game. Pettis’s view is a crude Keynesian analysis that ignores even Keynes himself, who claimed that it is investment that grows an economy, with consumption following, not vice versa.

The real challenge for China’s economic future is how to avoid much of its investment going into unproductive areas like finance and property that have now led to serious problems. And also in what way the growing contradictions between the state and capitalist sectors in China are to be handled in Xi’s third term.

Capitalist sector

The reason that western analysts are so sceptical of the Chinese model is that they are steeped in a different economic model for growth. They are convinced that China can only be ‘successful’ (like the economies of the G7!) if its economy depends on profitable investment by privately-owned companies in a ‘free market’. And yet the evidence of the last 40 and even 70 years is that a state-led, planning economic model that is China’s has been way more successful than its ‘market economy’ peers, such as India, Brazil or Russia - and even the G7.

The lessons of the global financial crash and the great recession of 2009, the ensuing long depression to 2019 and the economic impact of the pandemic slump are that introducing more capitalist production for profit will not sustain economic growth and certainly not deliver “common prosperity”. The real question is whether that investment is productive of new value or is wasted on unproductive consumption: eg, property and financial speculation, and military spending.

And, on this issue, it is China’s large capitalist sector that threatens the country’s future prosperity. The real problem is that in the last 10 years (and even before) the Chinese leaders have allowed a massive expansion of unproductive and speculative investment by the capitalist sector. In the drive to build enough houses and infrastructure for the sharply rising urban population, central and local governments left the job to private developers. Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale. Of course, homes needed to be built, but, as Xi put it belatedly, “homes are for living in, not for speculation”.

Beijing wanted houses and local officials wanted revenue. The capitalist housing projects helped deliver both. But the result was a huge rise in house prices and a massive expansion of debt. Indeed, the real estate sector has now reached over 20% of China’s GDP. China’s private-property sector is now composed of ‘zombie’ companies just like 15%-20% of those in the major capitalist economies. The question now is whether the Chinese authorities are going to allow these firms to go bust. Local governments are now trying to ensure that the homes promised by the likes of Evergrande to 1.8 million people will be built by taking over the projects, while many property developers will be liquidated.

However, there will not be a financial crash in China, because the government controls the financial levers of power: the central bank; the big four state-owned commercial banks, which are the largest in the world; and the so-called ‘bad banks’, which absorb bad loans; big asset managers; and most of the largest companies. The government can order the big four banks to exchange defaulted loans for equity stakes and forget them. It can tell the central bank, the People’s Bank of China, to do whatever it takes. It can tell state-owned asset managers and pension funds to buy shares and bonds to prop up prices and to fund companies. It can tell the state’s asset companies to buy bad debt from commercial banks. It can get local governments to take up the property projects to completion. So, because the state controls the banking system, a financial crisis is ruled out.

The current property mess is a signal that the Chinese economy is becoming more influenced by the chaos and vagaries of the profit-based sector. Just as in the economies of the west, the profitability of China’s capitalist sector has been falling.

And it is the private sector that has been doing badly during Covid and after. Profits in the capitalist sector have been falling. Cumulative profits for the first eight months of 2022 earned by China’s industrial firms fell 1.4% compared with 2021, as high raw material prices and supply chain disruptions due to Covid-19 curbs continued to squeeze margins and disrupted factory activity. But profits at state-owned industrial firms rose 14%, while those in the private sector fell 9%. Only the state sector is continuing to deliver. This is what also happened in the global financial crisis of 2008-09, which China avoided by expanding state investment to replace a ‘flailing’ capitalist sector.

The capitalist sector has been increasing its size and influence in China, alongside the slowdown in real GDP growth, investment and employment, even under Xi. A recent study found that China’s private sector has grown not only in absolute terms, but also as a proportion of the country’s largest companies, as measured by revenue or (for listed ones) by market value, from a very low level, when president Xi was confirmed as the next top leader in 2010, to a significant share today. State-owned enterprises (SOEs) still dominate among the largest companies by revenue, but their pre-eminence is eroding.

This is intensifying the contradictions between the profitability of the capitalist sector and stable productive investment in China. The accumulation of financial and property assets based on huge borrowing is detracting from growth potential

State-sector investment has always been more stable than private investment in China. China survived, even thrived, during the great recession - not because of a Keynesian-style government spending boost to the private sector, as some economists, both in the west and in China argued, but because of direct state investment. This played a crucial role in maintaining aggregate demand, preventing recessions - and reducing uncertainty for all investors.

When investment in the capitalist sector slows down, such as when profits fall, in China the state sector can step in. SOE investment grew particularly fast over 2008-09 and 2015-16, when the growth of non-SOE investment slowed down. As David Kotz showed in a recent paper,

Most of the current studies ignore the role of SOEs in stabilising economic growth and promoting technical progress. We argue that SOEs are playing a pro-growth role in several ways. SOEs stabilise growth in economic downturns by carrying out massive investments. SOEs promote major technical innovations by investing in riskier areas of technical progress. Also, SOEs adopt a high-road approach to treating workers, which will be favourable to the transition toward a more sustainable economic model. Our empirical analysis indicates that SOEs in China have promoted long-run growth and offset the adverse effect of economic downturns.²

The debt-fuelled property bubble has also sharply increased inequalities of income and wealth in China. And it is well known that China has a very high level of inequality of income. Its Gini index of income inequality is high by world standards (although it has fallen back in recent years).

Indeed Xi’s call for “common prosperity” is a recognition that the capitalist sector fostered by the Chinese leaders (and from which they obtain much personal gain), has got so out of hand that it threatens the stability of Communist Party control - what Xi and the Chinese leaders have called the “disorderly expansion of capital”.

Take billionaire Jack Ma’s comment before he was ‘re-educated’ by the authorities:

Chinese consumption is not driven by the government, but by entrepreneurship, and the market … In the past 20 years, the government was so strong. Now, they are getting weak. It’s our opportunity; it’s our show time, to see how the market economy, entrepreneurship, can develop real consumption.³

Last year, the Chinese government set up a special zone to implement “common prosperity” in Zhejiang province, which also happens to be the location of the headquarters of several prominent internet corporations - Alibaba among them. This heralded a tough crackdown on wealthy elites⁴ - including China’s burgeoning group of technology billionaires.

At its August 2021 meeting, the Central Finance and Economics Committee, chaired by Xi, confirmed that “common prosperity” was “an essential requirement of socialism” and should go together with high-quality growth. The professed aim is to “regulate excessively high incomes” in order to ensure “common prosperity for all”.

There are two reasons why Xi and his majority in the CP leadership have launched the “common prosperity” project. The first is the experience of the Covid pandemic. As in the major capitalist economies, this exposed huge inequalities to the general public in China - not just in income, but also in rising wealth for the billionaires, who reaped huge profits during Covid, while the majority of Chinese have suffered lockdowns, loss of income and rising living costs.⁵ The share of personal wealth for China’s billionaires doubled from 7% in 2019 to 15% of GDP in 2021.

If this were allowed to continue, it would begin to open up schisms in the CP and the party’s support among the population. Xi wants to avoid another Tiananmen Square protest (1989) after a huge rise in inequality and inflation under the ‘social market’ reforms of ‘paramount leader’ Deng Xiaoping. The government had to act to curb the unbridled expansion of unproductive and speculative investment.

Xi’s crackdown on the billionaires and his call for reduced inequality is yet another zig in the zig-zag policy direction of the Chinese bureaucratic elite: from the early decades of Mao to Deng’s ‘market’ reforms in the 1980s; to the privatisation of some state companies in 1990s; to the return to firmer state control of the ‘commanding heights’ of the economy after the global slump in 2009; then the loosening of speculative credit after that; and now a new crackdown on the capitalist sector to achieve “common prosperity”.

These zig-zags are wasteful and inefficient. They happen because China’s leadership is not accountable to its working people; there are no organs of worker democracy. There is no democratic planning. Only the 100 million party members have a say in China’s economic future, and that is really only among the top. Far from the answer to China’s mini-crisis requiring more ‘liberalising’ reforms towards capitalism, China needs to reverse the expansion of the private sector and introduce more effective plans for state investment - but this time with the democratic participation of the Chinese people in the process.

US hegemony

Even as Xi Jinping was promising the CPC national congress that China would “resolutely win the battle” in key areas of technology, employees of technology companies in China and elsewhere were being told to down tools. Dozens of the hundreds of executives and engineers with US citizenship or green cards who work in or with China’s semiconductor sector, many of them born in China, have been told by their employers - whether those are foreign or Chinese companies - to stop work, while their employers seek clarification of a new US rule that bars US citizens and residents from supporting China’s advanced chip-making industry without a licence.

It is now crystal-clear that the US, enabled by a bipartisan consensus in Washington, is determined to stop China upgrading technologically. This has massive implications for Beijing’s ambitions in areas such as artificial intelligence and autonomous driving. The new Chips Act introduced by the Biden administration is accompanied by a 139-page report released by the Department of Commerce’s Bureau of Industry and Security.

The report targets not only US companies, but also anyone with a US passport or green card, involved in selling tech products to China. This puts the many founders of Chinese tech companies who were educated in the US, and acquired a US passport on the way, in a seemingly difficult position. It will also make it much harder for those companies to attract talent. Similarly, research laboratories set up by some Chinese companies in the US - eg, Alibaba and Tencent - now look vulnerable. And US pressure will be brought to bear to stop Dutch and Japanese companies from supplying China.

All of the above makes clear the extent to which China is now treated as “an enemy” of the US. This goes far beyond what used to be called “containment”. It also raises the issue of how long Beijing will continue to turn the other cheek, since, so far, it has done nothing to make life difficult for American companies operating in China (save for its Covid restrictions), on the view that it wants to keep encouraging foreign direct investment.

The US move on chips also has big implications for TSMC and other Taiwan companies, given the amount of semiconductors Taiwan exports to the mainland. Taiwan’s chip (integrated circuits) exports to China totalled $155 billion in 2021. Indeed, the most interesting aspect of Nancy Pelosi’s Taiwan trip in early August was her meeting with TSMC founder Morris Chang and chairman Mark Liu - most particularly in the context of legislation on semiconductors passed by Congress in late July, which will provide $52.7 billion in subsidies to encourage chip manufacturers to build factories in America.

Unlike previous attempts by the Trump and Biden administrations to target specific Chinese companies from accessing advanced technologies (Huawei was the classic example), the new rules effectively cover every Chinese entity. They, or their US or foreign suppliers, will have to apply for a licence to gain or provide access to advanced chip technologies.

If the US strategy does prove effective - and the response of a wide range of non-Chinese companies operating in the sector in freezing dealings with China suggests it could be - it would cut China off from the critical building blocks of most 21st century technologies.

Why is the US applying these drastic measures against China’s trade and technology? It is the fear that China could become not just a manufacturing and import source for US consumers, but a rival in every area to US hegemony over the world economy.

What particularly triggered this new policy on China by the US was the global financial crash and the great recession. Under its state-controlled model, China survived and expanded, while western capitalism collapsed. China was fast becoming not just a cheap-labour manufacturing and export economy, but a high-technology, urbanised society with ambitions to extend its political and economic influence beyond east Asia. That was too much for the increasingly weak imperialist economies. The US and other G7 nations have lost ground to China in manufacturing, and their reliance on Chinese inputs for their own manufacturing has risen, while China’s reliance on G7 inputs has fallen.

According to a recent report by Goldman Sachs, China’s digital economy is already large, accounting for almost 40% of GDP and fast growing. Although it still lags behind the US, Europe, Japan and South Korea in its IT share of GDP, the gap has been narrowing over time. No wonder the US and other capitalist powers are intensifying their efforts to contain China’s technological expansion.

So the US strategy changed. If China was not going to play ball with imperialism and open up its economy completely to foreign investment, but rather continue to expand its technology base to compete with the US, then it had to be stopped. The recently deceased Jude Woodward wrote an excellent book⁶ describing this strategy of containment that began - even before Donald Trump launched his trade tariff war with China, on taking the US presidency in 2016. Trump’s policy - at first regarded as reckless by other governments - is now being adopted across the board, after the failure of the imperialist countries to protect lives during the pandemic.

The aim is to weaken China’s economy and destroy its influence and perhaps achieve ‘regime change’. Blocking trade with tariffs; blocking technology access for China and their exports; applying sanctions on Chinese companies; and turning debtors against China. This may all be costly to imperialist economies, but the cost may well be worth it, if China can be broken and US hegemony secured.

The CPC congress emphasised China’s response: “We must adhere to science and technology as the number-one productive force, talent as the number-one resource [and] innovation as the number-one driving force.”⁷ So Beijing sees the decision to try to freeze Chinese domestic manufacturing above a defined level of technological advancement as deeply provocative. Forcing China to rely on foreign production for the latest and greatest chips plays exactly into Xi’s fear of “technological vassaldom”. So China is moving towards a more self-reliant growth model.

That is the basis of what the Xi leadership calls a ‘dual circulation’ development mode, where trade and investment abroad is combined with production for the huge domestic market. Formally announced at a politburo meeting in May 2020, this sets out a rebalancing of the Chinese economy away from “international circulation” (namely, reliance on external demand as a stimulus to growth) towards “domestic circulation” (increasing self-dependence).

The political hot spot for intense conflict between the US and China is Taiwan - taken over by fleeing nationalist forces in 1949. From the beginning, the Chinese government and the United Nations recognised Taiwan as part of China, but the nationalists were backed by the US with funds and arms - first with the aim of overthrowing the CPC on the mainland and later, when that became impossible, to maintain the island’s autonomy from China. And, since the rise of the Chinese economy, the US and the rest of the imperialist bloc has encouraged moves by the Taiwanese to build and confirm total independence. Taiwan could then become a permanent thorn in China’s side and also the launchpad for military operations against Beijing in the future.

The Russia invasion of Ukraine has given the US and Nato the excuse to intensify the economic, political and military encirclement of China, with Taiwan as its hub. The US has engaged in nearly 400 military interventions (using the broadest definition) between 1776 and 2019, with half of these operations occurring since 1950 and over 25% occurring in the post-cold war period. They have revolved around economy, territory, social protection, regime change, protection of US citizens and diplomats, policy change, empire and regime building. The US - backed by an extended Nato, no longer confined to the Atlantic seaboard - sees China as the next area for ‘intervention’ down the road.

The western media helps by continually talking of China’s so-called ‘aggressive behaviour’ and its crimes against human rights. Whatever the truth in those charges, they are easily matched by the crimes of imperialism in the last century alone: the occupation and massacre of millions of Chinese by Japanese imperialism in 1937; the continual gruesome wars post-1945 conducted by imperialism against the Vietnamese people; Latin America and the proxy wars in Africa and Syria; the more recent invasion of Iraq and Afghanistan; the appalling nightmare in Yemen by the disgusting US-backed regime in Saudi Arabia ... And do not forget the horrific poverty and inequality under the imperialist mode of production.

But the economic and political conflict between China and the US is the major geopolitical issue of the 21st century - much larger than the Russia-Ukraine war. US national security advisor Jake Sullivan summed it up recently: “This is a decisive decade … in which the terms of our competition with the People’s Republic of China will be set.” He continued: “The PRC’s assertiveness at home and abroad is advancing an illiberal vision across economic, political, security and technological realms in competition with the west.” So China must be stopped, because “It is the only competitor (to the US) with the intent to reshape the international order and the growing capacity to do it.”

China is at a crossroads in its development. Its capitalist sector has deepening problems with profitability and debt. But the current leadership has pledged to continue with its state-directed economic model and autocratic political control. And it seems determined to resist the new policy of ‘containment’ emanating from the so-called ‘liberal democracies’.

The trade, technology and political ‘cold war’ is set to heat up over the rest of this decade, while the planet heats up too.

Michael Roberts blogs at thenextrecession.wordpress.com

Financial Times October 4.↩︎
thenextrecession.files.wordpress.com/2021/10/kotz-on-state-enterprises.pdf.↩︎
www.theguardian.com/world/2019/jul/25/china-business-xi-jinping-communist-party-state-private-enterprise-huawei.↩︎
www.theguardian.com/world/2021/aug/18/chinese-president-xi-jinping-vows-to-adjust-excessive-incomes-of-super-rich.↩︎
See thenextrecession.wordpress.com/2021/08/08/chinas-crackdown-on-the-three-mountains.↩︎
J Woodward The US vs China: Asia’s new cold war Manchester 2017.↩︎
www.chinatalk.media/p/china-responds-to-chip-export-controls.↩︎