China: no Shangri-la for capitalism

china communist party

The 19th Congress of the Chinese Communist Party, held from 19-24 October 2017, presented China as confident in its future and cast the country as playing a leading role in shaping the world ahead. China’s economic achievements since the 1949 revolution are considerable; it has lifted over 500 million of its people out of poverty and it has grown to having the world’s second biggest economy after that of the US; giant multinational corporations and banks now queue up to do business in China. However, just as China has embraced the world capitalist system, so it has rendered itself vulnerable to the crisis gripping this system, and shows of confidence belie creeping anxiety that the Chinese success story cannot last. Trevor Rayne reports.

President Xi Jinping told the Congress: ‘We must be confident in our path, in our theory and in our system as well as our culture.’ He proceeded, saying: ‘Socialism with Chinese characteristics has crossed the threshold into a new era. It offers a new option for other countries and nations who want to speed up their development while preserving their independence.’ This alternative model is intended as a contrast to the US and neo-liberalism. The confidence indicates a willingness to engage more closely with imperialist finance, to open China up to international banks and more foreign investment and to expand China’s own investments and reach abroad. The term ‘socialism with Chinese characteristics’ was introduced by the Party in 1982. The state consciously used capitalist methods of development and this has inevitably taken China down the capitalist road to development.

In 2003, China had 4.2% of world output; by 2016 this had risen to 15.1%. At the end of 2016 China’s banking system, measured by the value of assets held, overtook that of the Eurozone, to become the world’s largest. This indicated China’s growing influence on world finance and reflected its reliance on debt to drive growth since the global financial crisis of 2008-09. In 2016, China’s banking assets had reached $33 trillion, compared with $31 trillion for the Eurozone and $16 trillion for the US. The value of China’s banking system is more than three times the size of the country’s gross domestic product (GDP). Today, nearly 100 countries have China as their largest trading partner, compared with 57 countries for the US. China plans to lend over $1 trillion for infrastructure projects in the world over the next decade. China’s One Belt, One Road project is intended to tie Europe, Asia and the Middle East together as a trading zone. Now, 20 Chinese cities are directly connected to Europe by rail links and the amount of freight sent this way has increased five-fold since 2013. Chinese companies spent $220bn on acquiring overseas businesses in 2016. Just as the capitalist crisis has impacts on China, so what happens to the Chinese economy has repercussions for the world.

Opening up

On becoming President in 2012 Xi said: ‘The Communist Party must stick to the correct path of reform and opening up.’ By opening up the Party intended to stimulate economic growth with injections of foreign capital and to increase China’s influence regionally and globally. China’s $7 trillion stock market and its $10 trillion bond market are the world’s second and fourth largest, respectively (Financial Times 21 November 2017). Bonds are a form of IOU that can be traded; in China, many bonds are issued by state-owned enterprises as a way of raising funds. International finance has been seeking to prise China open for investment for decades. The Chicago-based investment research and management firm, Morningstar, reckons the average return on funds invested in China in the first six months of 2017 was 19%; this is relatively high.

Zhou Xiaochuan, the Governor of the People’s Bank of China (the central bank) said in June 2017 that lack of competition had made Chinese financial groups ‘lazy’. The previous year the Bank had opened up its interbank bond market to international banks, investment companies, pension funds and similar financial investors. However, foreign banks’ share of China’s financial market remained less than 2%; that may now change. On 10 November 2017, the day after US President Trump left China, the Chinese government said it would relax or eliminate limits on foreign ownership in commercial banking, securities, futures, asset management and insurance. China had restricted foreign participation by using joint venture requirements and caps on foreign ownership. The cap on foreign shares in securities, fund management and futures companies is to be raised from 49% to 51%. China is also going to remove the 20% limit on foreign ownership of commercial banks and asset management companies by a single foreign investor and the 25% cap on total foreign ownership of such companies. The limit on foreign stakes in life insurance joint ventures will be raised to 51% in three years and removed entirely in five years.

By opening up in these ways, China is not only seeking more foreign capital; it also wants reciprocity from capitalist powers. The US technology companies are still world leaders and China wants access to their intellectual property, which the US restricts. Xi Jinping said that China intends to draw level with the US in artificial intelligence (AI) by 2020, overtake it by 2025 and dominate global AI five years after that. Australia has barred Chinese companies from some farmland and transmission company deals. Other countries operate similar barriers. China wants them taken down.

Also, after Trump’s visit, the China Investment Corporation, responsible for managing part of the state’s foreign exchange reserves, agreed with Goldman Sachs, the US investment bank, to set up a $5bn fund to invest in US companies that export to China. In June 2017, HSBC became the first foreign bank to be approved as a majority-owned securities company in China, taking 51% of HSBC Qianhai Securities. The Chinese government views HSBC as a Hong Kong company, giving it preferential treatment. HSBC already owns 20% of the bank of Communications, China’s fifth largest lender. HSBC and Standard Chartered Bank rely on Asia to enhance their profits; HSBC increased its loans to Guangdong province local government by $1.1bn in the third quarter of 2017.

International finance, with its headquarters in London and New York, will be desperate to profit out of any openings that the Chinese government gives it. However, it will not leave its troubles behind at the border; China is not a Shangri-la for capitalism.

Debt overhang

Speaking at a press conference conducted alongside the Communist Party Congress, the Governor of the People’s Bank of China warned: ‘If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a “Minsky Moment”. That’s what we should particularly defend against.’ A Minsky Moment is named after the US economist Hyman Minsky, known for his observation of how banking creates instability at the heart of capitalism; long periods of calm generate over-confidence as banks engage in ever more risky speculation and lending. Hidden risks suddenly become evident and asset prices slump, leading to defaults.

When the 2008 financial crisis erupted, the Chinese government launched a $653bn stimulus programme to compensate for any fall in export earnings. The government has periodically continued to borrow and spend. This additional money has fuelled an expansion in lending. Credit has been growing at about 20% a year since 2009, considerably faster than the gross domestic product (GDP) which is currently growing at about 6.8% per annum. China’s corporate sector is the most indebted in the world, reaching 170% of GDP. ‘According to the Institute of International Finance, China’s ratio of household debt to GDP rose to 45% in the first quarter of 2017 – far beyond the emerging market average of 35%. Total debt, including companies’, is now more than three times gross domestic product’ (Financial Times 21/22 October 2017).

China’s continuing economic growth has required a rapid rise in debt. Ever more credit is needed to achieve less growth. The longer that debt rises as a proportion of GDP the greater is the likelihood of a financial crisis. At his press conference the Governor warned of speculation and property bubbles. He had previous experience to reflect on: by the first week of September 2015 the Shanghai stock market had fallen 40% since June that year, wiping $5 trillion off share prices. This is a sum greater than the entire German economy (see FRFI 247 October/November 2015).


Rome, we are told, was not built in a day. China built the equivalent of a new Rome, measured in floor space, every six weeks in 2016 (Financial Times 20 October 2017). 60% of China’s bank loans are directly or indirectly tied to real estate, and 38% of all Chinese bank loans issued in the year to August 2017 were for mortgages. Housing began to be privatised in China in 1998; previously it had all been state owned. One senior Chinese official said that the economy had been ‘kidnapped’ by property. In his speech to congress Xi Jinping said that ‘houses are for living in, not for speculation’. The reality is that if you introduce capitalism into China you invite speculation in property. House prices relative to incomes are significantly higher in China’s major cities than are those of London. Housing in Beijing, Shanghai, Shenzen and Hong Kong ranks as the world’s most expensive in terms of price-to-income ratio. Due to property speculation there were an estimated 50 million houses, or 22% of the total urban housing stock, already reported vacant in 2013.

The health of China’s banking system is inextricably bound up with the fate of its property sector. In September 2017, the credit rating agency Standard & Poor’s downgraded China’s sovereign debt rating. As China is integrated into international capitalism, so it is being subjected to capitalism’s tendency towards crisis. The government will attempt to slow down the expansion of debt and reduce it, but this risks increasing unemployment and pushing down living standards. In a country of enormous inequality this could prove socially explosive and politically dangerous for President Xi and the Chinese Communist Party.

‘Women hold up half the sky’

Approximately one in 15 Chinese adults, or 90 million people, are Party members. 2,280 Party delegates attend the Congress; about a quarter of the delegates are women. This is commensurate with female representation in the Party. 204 delegates were elected to the Central Committee, of whom just ten were women. From the Central Committee is drawn the 25 member Politburo of whom only one member is a woman. The highest body is the Standing Committee of the Politburo, none of whose seven members is a woman. Women have never made up more than 10% of the Party’s Central Committee. Socialist construction requires the advance of women to positions of authority in society.

In his address to the Congress President Xi Jinping pointed to the ‘unbalanced and inadequate development and the people’s ever growing needs for a better life’. He said that China intended to increase investment in health, education, public services, pensions and family allowances. These contradict the invitation to imperialist finance to play a greater role in China. The diminished role of women in the Chinese Communist Party reflects its decay. As Mao Zedong said: ‘Women hold up half the sky.’

Fight Racism! Fight Imperialism! 261 December 2017/January 2018


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