China stumbles

Pin It

By the end of the first week of September 2015 the Shanghai stock market had fallen 40% since June, wiping $5 trillion off share prices. This is a sum greater than the entire German economy; what happens in China reverberates around the world. There is hardly a multinational corporation that is not tied up with China. On 24 August, named as Black Monday, as Shanghai’s shares dropped, $44bn was lost in two hours of London’s FTSE100 trading and New York’s Dow suffered its largest ever fall in a single day. Imperialism is seeking to deepen its penetration of China and the City of London is keen to embrace China into imperialist financial circles. Sections of the US ruling class are more wary and fear its weight as a potential rival. However, the integration of China into international capitalism is subjecting it to capitalism’s tendency towards crisis. Will the Chinese government enforce political controls to defend the state and try to stabilise the economy or will it yield to market liberalisation and imperialism? The Financial Times remarked: ‘The next stage for China’s economy is a conundrum. Its resolution will shape the world’ (2 September 2015). Trevor Rayne reports.

In November 2013 the Chinese Communist Party (CCP) pledged to ‘let the market play the decisive role in allocating resources’ while also saying that it would maintain ‘the leading role of the state-owned sector’. These are contradictory commitments. China’s four biggest banks are state-owned, and state-owned enterprises (SOEs) constitute 40% of China’s gross domestic product. Foreign capital wants more access to China’s financial markets and privatisation of the SOEs. The Chinese government is seeking World Trade Organisation market economy status; such status would make it more difficult for other countries to impose protectionist import restrictions on Chinese-made goods. The Chinese government’s interventions to stop the Shanghai stock market falling and reservations about privatising SOEs are presented by those who fear it as evidence that China should not be given market economy status.

Together with the tensions between the state and national and international markets, Chinese premier Li Keqiang says that China is committed to the ‘painful and treacherous’ process of transforming its economic model from one dependent on investment, manufacture and exports to one driven by consumption and services. Any such transformation would require higher wages and the expansion of China’s middle class, both of which would reduce the competitiveness of China’s low wage economy. The Chinese government says that a decreased growth rate of 7% per annum is the ‘new normal’, down from 10% in recent decades. Any slowing of economic growth risks increasing social unrest and China’s working class is growing more militant. Nevertheless, British Chancellor of the Exchequer George Osborne noted in Beijing on 20 September that ‘Even if the Chinese economy isn’t growing in double digits, it will still be creating an economy of at least the size of the United Kingdom’s in the next five years.’ Osborne was in China asking the country to build nuclear power plants in Britain, to invest in high speed rail in Britain, to make the City of London the principal overseas base for Chinese finance and to link the London and Shanghai stock exchanges so that Shanghai shares can be traded in London.

The Chinese motor sputters

With China’s economy slowing, the government devalued the renminbi currency on 11 August to boost exports. This was the first renminbi devaluation since 1994 and the currency had risen up to 50% against a collection of other currencies since 2005, making Chinese exports less competitive. Currency speculators started selling off renminbi, forcing the state to spend $200bn to stop it falling precipitously. Anxiety about China’s economy spread and share prices began to tumble. The government ordered state-owned funds and investors to buy shares on a massive scale and prohibited their sale by large holders. Another $200bn was spent by the state propping up share prices.

The CCP’s response to Black Monday was to condemn ‘global financial markets [that] have overreacted like a burnt child fearing fire’. A reporter was paraded on television to apologise for an article he had written about the stock market and executives from an investment bank were arrested for insider trading. After share price falls in July the CCP’s People’s Daily pronounced that ‘Rainbows always appear after the rains’ – presumably accompanied by pots of gold. This August a CCP directive to the media stated that: ‘The focus for the month of September will be strengthening economic propaganda and … promoting the discourse on China’s bright economic future and the superiority of China’s system.’ The Financial Times was less impressed, saying that the Chinese authorities’ attempts to keep share prices from falling and search for scapegoats showed a failure of confidence.  

China is a motor for the world’s economy. In 2014 China accounted for about 40% of the world’s economic growth. Investment constituted 46% of China’s gross domestic product and a third of global investment occurred in China. China produces more steel in six weeks than the US does in a year. Currently China’s per capita income is a quarter of that of the US, but if it reached 70%, like that of South Korea, its economy would be bigger than those of the US and Europe combined. The government intends to raise output per head 60% by 2021.

Trade between Africa and China reached $200bn in 2014, twice the volume of US-Africa trade. China’s trade with Latin America was $272bn in 2013, a 22-fold increase on the figure for 2000 and 80% that of the US. However, China’s fixed asset investment for August 2015 was the slowest it has been in 15 years and production of cement and electricity fell for the first seven months of the year. The value of China’s imports dropped 14.3% in the year to August 2015 and exports fell 8.3%. In August, China’s iron ore imports were down 14% and crude oil imports fell 13% from July’s figures. If China slows it has a serious impact on many countries that depend on sales of commodities: Brazil, Venezuela, Russia, Kazakhstan and the Gulf States are all adversely affected. Canada’s economy, a major mineral exporter, has moved into recession and Australia’s has slowed, with iron ore and other mineral prices falling. Iron ore prices have halved in 15 months and oil prices more than halved. In the first six months of 2015 world trade underwent its largest contraction since 2008. China can export recession and exacerbate the financial crisis. When China devalued the renminbi in July commentators warned of a risk of competitive devaluations such as occurred in the 1930s Great Depression.

Which way will China turn?

International investors inspect Chinese government policy with unblinking eyes. Just 1.7% of China’s capital market is accounted for by overseas investors. The Industrial and Commercial Bank of China (ICBC), the world’s biggest bank if measured by assets, reckons that the proportion will rise to 30%, which is typical in emerging markets. With tight quotas, only 3% of China’s stock market is foreign owned. Foreign businesses account for less than 2% of China’s banking sector. International capital would love to prise China open for investment and it will use lures and threats to try and do so.

China’s pursuit of World Trade Organisation market economy status is accompanied by its desire to have the renminbi accepted by the International Monetary Fund as having special drawing rights, alongside the US dollar, sterling, the yen and the euro. If the renminbi is accepted then China could draw on IMF funds in a crisis and the renminbi would move towards becoming an international reserve currency. Recognition of the renminbi could challenge US and European dominance of international financial governance. It is estimated that there may be the equivalent of $100bn worth of renminbi held in different countries’ central bank reserves, about half the amount held in Australian and Canadian dollars. At the IMF, an 85% majority is required to approve major decisions (like imposing austerity on Greece or demanding privatisation). The US has 16.74% of the votes and so wields a veto, China has 3.8%. To be acceptable for the IMF’s special drawing rights the renminbi would have to be assessed as freely convertible for capital transactions, but Chinese authorities keep controls in place fearing that their removal would increase financial instability.

China’s foreign exchange reserves are the largest in the world but they fell by 2.6% in August, a drop of $94bn, the steepest on record, as the People’s Bank of China sought to protect the renminbi. In response, on 15 September the Chinese government made it easier for Chinese companies to borrow foreign currency from abroad and issue short-term renminbi bonds (a form of borrowing) in the City of London. Previously Chinese companies needed state approval for such deals, now they are only required to register them. The CCP, with 86 million members representing wide sections of society including workers and capitalists, has conflicts of interest and opinion within it. US, British, European and Japanese capitalists would love to get hold of the SOEs and in August 2015 China’s government said it would reform them. However, on 21 September the government explained that the CCP must tighten control of them to maintain the ‘socialist direction of their development’ and ruled out ‘mixed ownership’ of SOEs and any wholesale privatisation.

When the government last implemented SOE reforms, privatisation and liquidation in the 1990s, over 25 million workers were laid off. With the one child per family policy resulting in a fall in the working-age population and the exhaustion of the supply of workers from rural areas for industry, China’s working class is asserting its bargaining strength. There were 656 industrial strikes in 2013, 1,379 in 2014 and 1,642 strikes in the first eight months of 2015. Several of these strikes were against multinational companies that have invested in China. Average wages in China doubled from 2009 to 2015 but inequality is growing. Health care reforms have been introduced since 2006 and insurance covers 30% to 80% of the bill, depending on location and treatment; rural health care is worse than in the cities. However, hospitals have VIP wards that charge higher prices. The current anti-corruption campaign targeting officials is integral to maintaining the legitimacy of the CCP and the state. The support of the enormous Chinese working class cannot be taken for granted by the CCP or the government.

Sections of the US ruling class have no intention of attempting to seduce China or any section of its bourgeoisie; they want confrontation. US businesses are demanding sanctions against China for cyber and commercial espionage, which the Chinese government denies involvement in. The US military are demanding action against China for building islands in the South China Sea which they claim will be used for military purposes. US military expenditure is still over four-times that of China. Japan’s defence ministry has asked for a record military budget for 2016 and its parliament has passed a law allowing its troops to fight abroad for the first time since the Second World War. China said that it regretted the Japanese move but that it would strengthen its military capability to deal with any threat. For China, a stable environment has been necessary for its economic rise. With its military ‘pivot to Asia’, US imperialism seeks to contain China and end that stability.

FRFI 247 October/November 2015