“No economy is falling faster than China’s at this moment”
The first months of 2009 have seen a dramatic aggravation of the global capitalist crisis. This is confirmed by an unremitting flow of terrible economic data: surging unemployment, plunging industrial output, shrinking global trade, and a second wave (or is it the third?) of bank failures and bailouts. One crisis area, however, is causing more concern than most: China, the former ‘economic miracle’ has seen industrial output collapse. A Chinese recession will have dire, global, ramifications, akin to a flight crew that having issued a ‘Mayday’ signal suddenly finds their second and only functioning engine has also caught fire.
It should be remembered that most capitalist commentators, in the company of the Chinese regime and its economic advisers, dismissed the eventuality of a severe slowdown in China. It is not so long ago that the notion of ‘20 more years of double-digit growth’ was taken for granted in the same circles. Only four or five months ago, Merrill Lynch economists were predicting China would account for 40 percent of global economic growth in 2009 – one of many now redundant forecasts. The CWI has long warned that the so-called ‘miracle’ economy was based on precarious foundations and that, far from ‘decoupling’ from the wider capitalist crisis, China would be hit hard. While we have been proven correct, however, even we could not have exactly foreseen the speed at which economic day has turned to night.
Today’s barrage of economic readings is as spectacularly bad as the old statistics were spectacularly positive. China’s foreign trade has simply imploded, with exports down 17.5% in January, year-on-year, and imports down 43.1%. The hardest hit industrial sectors are textiles, toys, electronics, and other manufactured goods, but construction has also suffered a dramatic decline as evidenced by a host of suspended or abandoned projects. In the next few days new economic data will be published which may show that China is now officially suffering from deflation (falling prices) and may conceivably have posted an atypical trade deficit in February.
“China is in recession”
China has the world’s fastest slowing economy, according to Gordon G. Chang, author of the book The Coming Collapse of China, who accuses the Beijing regime of “fakery” over its economic statistics. “No economy is falling faster than China’s at this moment,” he told the U.S.-China Economic and Security Review Commission in the U.S. Congress on 17 February.
China’s GDP grew nine percent in 2008 after a 13 percent expansion in 2007, but slowed to an official rate of 6.8 percent in the final quarter of last year. Calculated in the same way as other large economies, such as the U.S. and Japan, however, China’s growth would have been negative in the last quarter, at minus 0.3%.
“China is in a recession regardless of what the highly massaged official numbers claim” argues U.S. economist Nouriel Roubini, who has been more accurate than most other bourgeois economists since the start of the global crisis. Roubini’s view on this is supported by many including Stephen Roach, chairman of Asia Operations at Morgan Stanley. The deceleration of China’s growth “to close to zero is absolutely stunning,” Roach told the same meeting of U.S. politicians. Moreover these assessments are backed up by other data from key industries such as steel and electrical power generation. In January, steel production was down 20 per cent from a year earlier, while electricity use was down 10 per cent.
Both Roach and Roubini challenge the government’s view that, based on extra stimulus measures, China will reach 8 percent GDP growth this year. This figure is sacrosanct in governmental circles as anything less will result in unemployment – already at historically unprecedented levels – spinning out of control. Roach, however, predicts growth of only 5.5 percent this year, while Roubini says 5 percent.
“Given the weak end of last year and weak beginning of 2009, the growth rate is likely to be no higher than 5.5 percent,” Roach told China Daily (21 February). Are these overly pessimistic assessments? Even the IMF, which has been a statistical ‘laggard’ throughout the crisis, predicts just 6.7 percent growth in China – that Beijing in other words will fail in its mission to ‘protect eight’ (i.e. 8% growth). Even that forecast, according to the IMF itself, may soon be revised downward along with other IMF forecasts for 2009.
The speed and suddenness of the economic collapse in China underlines the inter-connectivity of the capitalist world economy and the degree to which China’s economy has been integrated into it, both as an assembly-for-export platform for multinational companies and as a destination for often purely speculative capital flows, particularly into property or as ‘hedges’ (bets) on the rising value of the renminbi. Now all the speculative machinery has been thrown into reverse. China’s property bubble has begun to deflate and with most other Asian currencies in free-fall it is clear that Beijing will not allow the renminbi to rise further.
It is estimated that between $126 billion to $240 billion was smuggled out of China during the final quarter of 2008, evading the government’s currency controls. By way of comparison, $240 billion is roughly equivalent to the spending, over a one year period, embodied in the government’s November stimulus package (the 4 trillion renminbi or roughly $585 billion package stretches over 26 months).
Record unemployment
Even without statistical help the evidence of a devastating economic slowdown is there for all to see in industrial megacities such as Dongguan, Shenzhen and Shanghai, which have suffered a wave of factory closures. As one Guangdong government official exclaimed: “A factory with 100,000 employees can suddenly collapse. This was impossible before.”
The awesome destructive power of capitalism is shown by the example of Taiwan-owned Foxconn, whose Shenzhen factory is the largest in the world making electronic components. Taiwanese media now report that the company, which makes products for multinationals such as Microsoft and Nintendo, plans to cut its payroll from 260,000 to 100,000 workers. This is around half as many job losses – at just one plant – as in the entire eurozone so far this year.
Another graphic illustration of the crisis is the slump in demand for sea-borne containers. These have become a symbol of capitalist globalisation and China’s special role as the ‘factory of the world’ sending Nike trainers, Barbie dolls, and flat-screen TVs across the seas. The world’s largest maker of shipping containers, China International Marine Container, reported that its output of dry-bulk containers “basically stopped in the fourth quarter”. The Economist magazine spelt out the brutal reality: “$0.00, not counting fuel and handling: that is the cheapest quote right now if you want to ship a container from southern China to Europe. Back in the summer of 2007 the shipper would have charged $1,400. Half-empty freighters are just one sign of a worldwide collapse in manufacturing.” [The Economist, The collapse of manufacturing, 21 February 2009]
According to official figures, 20 million jobs were lost by migrant workers alone last year. Migrants are the most exploited and least protected section of the proletariat, on short-term job contracts, or no contract at all. Needless to say there is no safety-net for these workers in the form of dole payments or social security. Losing a job also invariably means losing a home as factory dormitories are closed and most migrants have no legal right to stay in the cities.
Independent economists believe the government’s figures understate the real situation, however, and that 30 million migrants have so far lost their jobs in a downturn that is barely one year old. Already the accumulation of a gigantic ‘reserve army’ of unemployed is exerting downward pressure on wages. Migrants who returned to factory cities in February after the New Year festivities have in many cases been forced to take jobs on inferior terms and wages than the jobs they had in January.
Poor inland provinces have reported a dramatic rise in the numbers of migrants returning home, which is placing a huge strain on resources. Another disastrous effect of this is the loss of remittances sent by migrants to their families in rural areas. This money has in past years vastly exceeded the sums spent by government – local and central – on rural development, construction, and paying for school or hospital fees.
No sector is safe
The situation facing China’s – relatively ‘privileged’ – urban working class is also increasingly bleak. Jobs fairs in major cities such as Beijing and Wuhan have been inundated by tens of thousands of job-seeking young people and university graduates chasing a diminishing number of vacancies. According to a recent survey by one of the country’s largest employment websites, 51job.com, almost a quarter of respondents said their company was already laying-off staff or not renewing contracts, and 42% said they were afraid they would be laid-off this year. In the still very significant state-controlled industrial sector there have been widespread announcements of pay cuts and short-time working, as well as lay-offs in the first instance of ‘irregular’ employees.
While the export sector is bearing the brunt of the crisis at present, other sectors such as steel, cement, and motor vehicles, that sell almost entirely into the home market, have also axed jobs and output levels. “For the first time in history, China passed the U.S.,” exclaimed a top General Motors executive when China became the largest car market in January this year. But car sales are falling in China too, only not as precipitately as in the U.S. The January sales results in China show a 14% contraction year-on-year (to 790,000 vehicles), compared to a 37% market slump in the U.S. (to 657,000 vehicles). Industry analysts quoted in Time Magazine (1 March) estimate that based on January’s figures, China’s car market will shrink this year for the first time in 20 years.
Chinese-owned car companies and their foreign joint-venture partners have already made production cuts and shed thousands of jobs. The government has unveiled a bailout for the industry in common with governments in the U.S. and several European countries. Rather than direct state support to companies, however, with foreign companies cornering 70% of the market, the Chinese bailout package consists mainly of retail tax cuts for consumers and special discounts for rural areas.
The economic downturn is also taking its toll on business investment. Morgan Stanley’s Wang Qing forecasts zero growth in manufacturing investment this year and a 12 percent drop in real estate investment [Wall Street Journal, 4 February]. This on one side reflects a crisis of profitability – a ‘profit crunch’ – alongside the evaporation of demand from the ‘market’, especially the all-important global market which accounts for more than 40 percent of China’s GDP (while domestic demand only accounts for 35 percent of GDP). Results for 350,000 companies showed average profits falling to four percent last year compared to 37 percent in 2007.
Dire global ramifications
The present crisis in China kicks away one possible ‘prop’ for world capitalism – this is the notion, which the CWI always challenged, that increased Chinese consumption could offset falling consumption in the U.S. and thereby stave off a global recession. China’s vast population are generally far too poor to engage in Western style consumerism. As Marx explained, the profits of the capitalists come from the ‘unpaid labour’ of the working class. In China’s case we have a graphic demonstration of the constricting effect this basic law of capitalist economics imposes on the development of a sizeable home market. For decades, China has ‘overcome’ this contradiction through an economic strategy based on exports – it now exports more in one day than it did in the whole year of 1978, when the ruling party embarked upon its pro-capitalist ‘reform’ strategy. But now as the global economy sinks into a possible depression, China finds itself up the proverbial creek, without a paddle!
China’s current industrial crisis will in its turn inflict massive disruption on the global economy, underlining the connectivity and mutual interdependence of capitalism as a world system. The report produced for last month’s Davos World Economic Forum of top capitalists described the onset of crisis in China as a “pivotal risk” to the prospect of a global economic recovery. The current slump in Chinese imports, which as we have seen are falling faster than exports, has triggered sharp falls in the global price of commodities such as oil and metals. Oil prices for example are down more than 60% from their peak last June. The shake-up in commodity prices is spreading recession to oil exporting nations such as Russia and Venezuela and metals exporters such as Chile and Ukraine.
Asian contagion
The collapse in Chinese demand is also dragging down the rest of Asia. Countries like South Korea, Taiwan, and Singapore, that trade heavily with China are now among the hardest hit by the global crisis. Korea is facing a contraction of gross domestic product (GDP) of around five percent this year, while Taiwan and Singapore are formally in ‘depression’ territory with a projected yearly decline of ten percent, far worse even than during the ‘Asian crisis’ of a decade ago. Malaysia, another key trading partner, is entering recession if not yet on the scale of Singapore or Taiwan. In a recent report on the region, the Financial Times commented that, “The speed and ferocity of Asia’s downturn has taken aback even the pessimists.”
Most seriously, Japan, the world’s second largest economy is now grappling with its deepest slump for more than 60 years. Major companies such as Toyota, Sony and Panasonic have announced historically unprecedented losses. In January the country’s exports, including Chinese orders for machinery and components, almost halved (minus 46% year-on-year).
“We cannot highlight strongly enough how truly mind-boggling Japan’s collapse in exports to China is,” commented Albert Edwards of Societe Generale. “Last July they were expanding at a 16 percent year over year pace. Now they are contracting at a 35 percent year over year rate! This is a phenomenon throughout the region.”
Japan is of crucial importance because of its weight in the global economy, as well as its close interconnections to both the U.S. and Chinese economies. It is also a hot topic of discussion – a historical reference point – as economists try to fathom what the worst-case-scenario might be in today’s cataclysmic environment. The news from Japan right now does not bode well. During its more than decade-long stagnation, the so-called lost decade, Japan entered “technical recession” no less than four times (1990, 1993, 1998 and 2001), but despite the seriousness of the situation then, these downturns pale in comparison with the present industrial collapse. Economists predict that unemployment may hit 10 percent by year end, from a level of 3.6% last November. At its worst during the lost decade, Japan’s unemployment touched five percent.
Government under pressure
Even during the boom years, the Chinese dictatorship feared nothing more than the prospect of a mass movement of the huge industrial working class and an echo of this in the impoverished countryside where two-thirds of the population, around 750 million, still live. Accordingly, the regime recently set up a new security ‘task force’ headed by vice president and heir apparent Xi Jinping, with province-level task forces headed by top provincial leaders, aiming to head off and disarm outbreaks of social unrest. As the South China Morning Post (3 March) reported, “What the government fears most is that ‘hostile forces at home and abroad’ might use discontent over rising unemployment, falling incomes, inequality and corruption to inspire strikes, protests and riots.” Confirming Marx’s analysis of the workings of capitalism, however, and the effects of this on workers’ consciousness, recent data shows a 95 percent rise in labour disputes in China during 2008. Some coastal regions experienced a tripling of the number of disputes compared to 2007.
Government jitters were in evidence when China’s annual rubber-stamp ‘parliament’ the National People’s Congress opened in Beijing last week. Two dozen arrests were made in Tiananmen Square on the opening day, including a farmer from inland China who sliced open his face as a desperate protest gesture. Separately, a group of about 100 petitioners from Shanghai were quickly dispersed when they tried to raise their grievances. The right to petition higher officials has existed since imperial times, but with the forcible closure of the large and unofficial petitioners’ camp in Beijing in the run up to last year’s Olympic games, even this ‘right’ has all but been abolished.
Stimulus measures – will they work?
At the NPC opening session, premier Wen Jiabao’s speech was followed intensely by financial markets around the world. On the previous day punch-drunk global stock markets (which have fallen by an average of 20 percent so far this year) soared on rumours of a new mega-stimulus package in China. New York’s Dow Jones Index shot up by more than four percent in anticipation. But no new stimulus package was announced by Wen and markets reacted immediately, resuming their rapid downward plunge. This episode underlines the now crucial role China plays within the global capitalist economy.
Undoubtedly additional Keynesian-style stimulus measures will be undertaken in China, probably sooner rather than later. This is in part due to the inadequacy – given the scale of the crisis – of November’s package. This point was made at the time by the CWI and chinaworker.info. That package, nominally worth 4 trillion renminbi ($585bn), is now widely dismissed in economic circles as “a Chinese fake”. This is because it contained a great deal of ‘air’ in the form of double book-keeping and repackaging of previously budgeted projects. Likewise the government’s follow-up announcement in January, of $123 billion to create a basic healthcare insurance system leaves a lot to be desired. Even if implemented in full this amounts to little more than 100 renminbi ($14.50) per person per year.
Of course, given the vast sums of money involved, it is not the case that Beijing’s measures have had no effect. But as Arthur Kroeber, head of the Beijing economic consultancy Dragonomics, spelt out:
“We know that a lot of money has been pumped into the economy and we know there’s been a slowdown in some of the signs of deterioration. A couple of indicators that were extremely negative have become slightly less negative. That’s not a recovery, but a slowdown of the rate at which things are getting worse.”
One – predictable – effect of the increased spending so far has been an upturn in financial speculation. Bank lending has risen this year (most banks are state-owned, as indeed they are in the U.S. and many European states nowadays), with the rate of lending almost doubling in January, over January 2008, to 1.6 trillion renminbi ($234bn). But according to the New York Times (4 March), fully one-third of this new lending, mostly to state-owned firms, has been funnelled into stock market trades, one reason for a short-lived upturn in the Shanghai Composite Index this year. This is a criminal misuse of the hard-earned resources of the Chinese people, not least because the temporary speculative gains on the stock market have been almost completely snuffed out again.
Marxists criticise the Keynesian measures of the Chinese and other governments because they are an attempt to treat the symptoms of the disease – recession and falling demand – rather than the disease itself, which is capitalism, the organisation of production for profit. These stimulus plans and bailouts have been crafted primarily to save the big companies, to fill their order books and avert bankruptcies, rather than to create jobs or raise the desperately low living standards of the masses. This represents a colossal misallocation of resources. As Bolivia’s Evo Morales has pointed out, the banking and other bailout measures so far adopted by governments worldwide amount to 313 times what the same governments are spending to meet the existential threat from climate change!
In the case of Beijing’s stimulus package, just 1% of the total is earmarked for extra healthcare and education spending and only 7% for public housing – in both cases these items occupy a smaller share than in Obama’s stimulus plan in the U.S. The emphasis on capital-intensive infrastructure spending in Beijing’s plan will not create jobs in sufficient numbers and will lock up resources in already over-invested sectors such as steel, cement and electrical power. Measures to raise living standards by scrapping crippling charges for schools and hospitals and rebuilding a basic welfare system are absent, yet it is precisely these measures that would stimulate the growth of China’s domestic market.
Another serious obstacle to the regime’s attempts to spend its way out of crisis is the fragmented state of China’s economy. The onset of the crisis and the first batch of stimulus measures have already been accompanied by a surge in internal protectionism as China’s 30-odd provinces attempt to save themselves at the expense of their neighbours. Anhui province, for example, has decreed that car and construction companies in the province must use Anhui-made steel, and its power plants have adopted the slogan: “Anhui power uses Anhui coal”.
This pattern is being repeated across the country, and not just for goods and services, but also for labour. Provincial officials in Guangdong are debating measures to keep out migrants from other provinces when there is now mass unemployment among Guangdong natives. Therefore, just as governments in the U.S. and Europe are using bailout packages to adopt protectionist measures, this is happening in China, only between its various ‘communist’-led provinces!
International socialist alternative
By far the biggest drawback with Beijing’s stimulus plan is that it is being executed through the same unaccountable, bureaucratic and staggeringly corrupt governmental machinery that already steers society’s wealth into the hands of a tiny minority. Marxists support increased state spending but we demand democratic control over this process, through independent mass organisation of workers and farmers, and we say no to any bailouts without genuine public ownership and working class control over the companies and industries in question.
The deepening crisis will put all governments and policies to the test. China’s ruling party like its counterparts internationally did not foresee this crisis and has no real solution other than to offload the crisis onto the backs of the working class and the poor. Governments will crawl their way ahead from one ‘unconventional’ economic policy to another, through attempts to arrive at regional and global agreements and through their breakdown, which is inevitable on the basis of capitalism.
Only the working class, by building powerful democratic and combative organisations and placing itself at the head of all the oppressed layers in society can offer a way out of this terrible crisis. This cannot be achieved solely on a national basis, no more than within one province or municipality. This is because of the degree of inter-connectivity of economies across Asia and the world. An international socialist alternative to the capitalist crisis, based on the democratically planned utilisation of society’s resources worldwide, must become the fighting goal of workers in China and around the world.
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