After three decades of spectacular growth, the Chinese economy is at a turning point.
The plunge in the stock market that has wiped trillions of dollars from the value of China’s listed companies is just one part of the story. More significant is the fact that growth is now at its lowest level for 24 years and is forecast to fall further.
Foreign trade is down by 6 percent and export markets are depressed. Industrial profits are falling and the manufacturing sector is in a funk. Capital is flooding out of the country and foreign exchange reserves are dropping.
The Chinese economy is not at risk of imminent collapse, but the coming years will certainly represent a break from the past decades. The factors responsible for the current slowdown have their origins in the very things that underpinned China’s emergence as a world economic power.
The Chinese economy has undergone the most rapid and sustained growth of any large country in the history of capitalism. In the 35 years from 1979 to 2014, the economy grew by 10 percent a year and doubled in size every eight years. Relative to the US economy, China has grown tenfold since 1980.
Several factors have been responsible.
First was the de-collectivisation of land in the late 1970s and early 1980s. The old collective farms were abolished and replaced by family farms geared towards production for the market. Agrarian productivity soared, providing a surge in food supplies for the cities.
Second was the introduction of town and village enterprises – business ventures introduced by municipal councils in the rural areas. These TVEs, which exploded in number in the 1980s, produced light industrial goods for the market and boosted rural incomes. For a period this reduced inequality between the rural and urban areas. They also soaked up some of the surplus labour no longer needed on the farms.
The third element was the closure of tens of thousands of old, inefficient and predominantly but not exclusively small and medium sized state owned enterprises (SOEs). These mainly were situated in the north of the country, the centre of heavy industry. The closures eliminated many loss-making businesses, releasing resources for use in other areas, but turned the north into a rustbelt.
The sacking of 50 million workers formerly employed by the SOEs drove down wages in the regions directly affected and put a lid on wages across the country as the now unemployed workers searched out work in other provinces. The mass closures also destroyed traditions of working class solidarity – the SOE workers had in many cases been central to the mass protests of the late 1980s that culminated in the nationwide movement of 1989 – known in the West as “Tiananmen Square”, but which was far more widespread and far more working class than is generally understood.
The fourth factor was the opening up of new industrial zones in the Pearl River Delta in the south (adjacent to Hong Kong and Macao), in Fujian province (close to Taiwan), and around Shanghai, the country’s commercial centre. The new industries established in these regions overwhelmingly produced for export markets and were powered by foreign investment. Former leader Deng Xiao Ping opened special low tax, free market economic zones in the Pearl River Delta in the early 1980s. Since then, foreign investment, initially by the Chinese diaspora in Hong Kong, and later by big Western, Japanese and Korean companies, has flooded into these targeted areas.
Drawn by the prospect of an apparently inexhaustible supply of cheap labour, foreign investment was further encouraged by the handover of Hong Kong to China in 1997 and China’s entry into the World Trade Organization in 2001, which provided increased access to markets, capital and managerial expertise.
The growth of manufacturing in China can only be understood with reference to the establishment of international production chains.
Hong Kong and Taiwanese owned companies, most famously Foxconn, set up factories on the Chinese mainland to supply Western retailers with clothing and footwear, white goods, electronic goods and computers, and other household items. In simple manufacture, these mainland operations make the product from start to finish. In other cases, such as Foxconn, the Chinese factories are assembly plants, putting together components produced in Taiwan, Hong Kong, South Korea and as far afield as Mexico.
In other cases, Western companies set up operations in China. The big US and European automotive producers, for example, operate plants on the mainland, both for the booming domestic market and for export. By 2008, nearly 60 percent of Chinese exports came from foreign-invested enterprises.
China was transformed from being one of the least internationally integrated big economies, with total trade accounting for only 9.5 percent of GDP in 1978, to the most integrated, with the share of trade rising to 60 percent by 2013.
The Chinese government ensured the continuing competitiveness of Chinese goods by repeated devaluation of the currency, from 1.5 yuan to the US dollar in 1978 to 4.8 in 1990 and 8.3 in 1994 – a level at which it was pegged for 11 years. The low currency has been another factor drawing in foreign money because it makes Chinese assets cheap for investors.
The export boom was extended by recycling the country’s trade surpluses into purchases of US Treasury bonds. With China proving a deep-pocketed buyer of US bonds, US interest rates were kept low, promoting growth in the US and securing markets for Chinese exports.
Investment has come not only from foreign investors. Many Chinese companies are still owned or controlled very closely by the state. SOEs are dominant in key areas such as steel, telecommunications, mining and energy, utilities, transportation and shipbuilding. They account for 30 percent of the value of all corporate assets.
There is no clear distinction in China between state and private capital. The mass privatisation program of the 1990s led to sections of the party-state bureaucracy morphing into private capitalists. Former SOE directors reappeared as owners of the businesses they once managed. Or subsidiaries were spun off as private businesses owned by former SOE functionaries. This was theft on a grand scale.
Private capitalists and state capitalists are part of the overarching Chinese ruling class. Business owners are welcomed into the Communist Party. One investigation found that the 70 wealthiest members of the Chinese National People’s Congress, its “parliament”, hold wealth of US$75 billion. The New York Times estimated in 2012 that the family of former premier Wen Jiabao holds $2.7 billion in assets.
The big SOEs and Chinese private business owners enjoy extensive support from the state, which provides them with privileged access to land, finance, raw materials and export licences. Provincial governments clear the way for their further expansion, flooding rural areas for big dam projects, seizing land from farmers, turning a blind eye to toxic incinerator plants and using the security forces to suppress workers.
The seizure of land by provincial governments to build apartments, shopping malls and industrial estates has been an important element in Chinese industrial expansion. It has substantially enriched the local bureaucracy and property developers across the country. Farmers are compensated in pennies and thrown into the job market to compete with millions of others.
If exports have been one engine of growth, investment has been another. It represents 40-50 percent of GDP, compared to 20 percent in the advanced economies.
Chinese SOEs have also become significant foreign investors as they try to secure reliable supplies of resources and energy to feed their steel mills and infrastructure projects. Investments in resource-rich Africa, Central Asia, Latin America and Australia have grown rapidly since the early 2000s, although the total stock of Chinese investment overseas still lags the advanced countries.
The push by the Chinese government in recent years to use its greater economic weight to draw other countries into a regional division of labour centred on the needs of Chinese industry is an indication that outward investment is now becoming more systematised.
The One Belt, One Road plan announced by the government last year represents the extension of this project, using both maritime and land transport links to draw neighbouring economies closer.
A new working class
The explosion of industrial production and construction since the 1980s has been made possible only by the equally rapid expansion of waged labour. While mass sackings were the norm in the north, in the south a new working class, 270 million strong, has come into being. Workers have come, for the most part, from rural areas and small towns in the coastal provinces and from further inland.
The first generation of these young migrant workers were industrial novices with no history of struggle. They were denied basic rights. The old Maoist model of a job for life, with housing and health care provided by the SOE work unit, was replaced by short term job contracts. And, as migrants, these new workers were denied citizenship rights as they lacked official residency permits (hukou) to live in the cities.
Intimidated and aware that any infringement of factory discipline could result in deportation back to their villages, the migrant workers were crushed under the thumb of the state. Wages were low and stayed low.
As the fortunes in the hands of the capitalists, bureaucrats and military chiefs with business connections boomed, China was transformed into one of the most unequal societies in the world. All those who share this wealth – including capitalists from the diaspora and from further afield in Asia, Europe and North America – are united in their determination to keep things that way.
The stripping away of job security and the old welfare system has contributed in another way to Chinese growth. It has encouraged Chinese workers to save a large proportion of their incomes to provide for themselves in their old age (or if they are injured at work) or to pay for housing and education for their children.
The state owned banks that hold workers’ life savings pay interest at less than the rate of inflation.
Low wages and low returns on bank savings have held down consumption. Household consumption fell from one half of GDP to only one third between 1980 and 2005, half the level of the US.
The state banks have used the massive pool of credit to lend at cheap rates to SOEs and other big companies. In other words, Chinese capitalism has advanced not just by exploitation of workers at the point of production but also by subsidised investment capital stolen from their pockets.
The imbalance between unprecedented levels of exports and investment on the one hand and meagre levels of consumption on the other – the very basis of China’s economic miracle – lies behind China’s problems today.
China is experiencing a crisis of overaccumulation. The growth of its productive capacity overwhelms the capacity of the domestic and export markets to soak up the supply of goods. The steel industry, for example, operates at only 60 percent capacity. Other industries suffering excess capacity include cement, plate glass, aluminium and shipbuilding.
Premier Wen Jiabao described the economy in 2007 as “unstable, unbalanced, uncoordinated and ultimately unsustainable”. The situation has only become more unstable and unbalanced since.
The global financial crisis led to a collapse in world trade. Thousands of Chinese companies shut their doors in the first half of 2009 and 20 million migrant workers were sacked in a matter of months. The government responded with a huge stimulus program equivalent to 14 percent of GDP.
The result was a rapid expansion in credit across the entire economy as the state-owned banks lent money to local government investment agencies. These agencies used the funds to embark on a crash program of airport, road, railway, bridge and new city construction. More than 20 new steel blast furnaces came online in 2013 alone.
The stimulus was successful in pushing growth rates up, but left a toxic legacy. The local government agencies are now weighed down with enormous debts and burdened by infrastructure that is seriously underutilised.
Private indebtedness also ballooned as companies took out big loans to build capacity. Much of this has been financed by the shadow banking sector, meaning that the actual extent of indebtedness is unclear.
And the export markets in the West that were meant to absorb China’s expanded productive capacity have grown only slowly in the last two or three years – in the first half of 2015, China’s exports actually fell by 1 percent. The government’s gamble that exports could lift China back to sustained 10 percent growth rates has failed.
The bubble economy
The big expansion of credit also found its way into the property market, which began to grow very quickly in 2010. Driven by the joint interests of the property developers and local bureaucrats, millions of apartments were thrown up. By 2014, apartment building, outfitting and sales accounted for 25 percent of GDP. Many of these apartments were bought by individual middle class investors who viewed the rising property market as a way to grow their wealth, a sentiment encouraged by the government.
The property bubble deflated in 2014. With hundreds of thousands of empty apartments sitting on the books, prices came down. Property developers have been kept afloat only by soft loans from the state banks because the government is anxious about the impact that a string of bankruptcies would have.
Starting in mid 2014, money flooded into the stock market as investors searched out better returns. They were encouraged to do so by the central government, which saw a rising stock market as a way both to boost household consumption – because investors would be more confident to go out and spend as the value of their shares rose – and to offload the debts of SOEs as they listed on the exchange. It was also in line with the 2013 decision by the Communist Party that markets would now play the “decisive” role in directing investment in the economy.
The government did all it could to pump up the bubble. By June this year the stock exchange had soared by 150 percent. The stock market was completely disconnected from the real economy, and from the profits generated by Chinese businesses. It was only a matter of time before it crashed. Attempts by the government to limit the fall generally have proven fruitless.
What’s more, every successive government stimulus package to keep the wheels of Chinese industry turning and boost asset prices has become less effective in generating economic growth. The interventionist power of the Chinese government is diminishing as years go by.
China in the world economy
China’s success as a major exporter has made it more vulnerable to decisions and trends beyond its borders. When it began to take off in the 1980s, exports and foreign investment were a very small element of the economy. The fluctuations in the world economy had little impact.
Today, the opposite is true: China is extremely sensitive to movements in the world economy.
That was obvious during the global financial crisis, when the collapse in export markets caused a sharp contraction in Chinese manufacturing. Now, with the world economy set for a period of sustained low growth, Chinese exporters are feeling the pressure again.
Corruption and economic slowdown
Slowing growth also presents a problem for the ruling class because it threatens the ability of the party leadership to buy off the contending factions in the Communist Party. Three decades of growth provided the cash to ensure that every section of the ruling class, at central, provincial, county and local levels, military and civilian, got a slice of the pie. This brought an end to the violent faction fighting that had raged in the party from the 1950s to the 1970s.
The corruption that has been part of this process also represented something of a drag on the economy and, very importantly, bred seething resentment towards party officials among the population. Chinese people see money gushing in torrents to well connected party officials and the offspring of party leaders.
Xi Jinping, who became president in 2013, responded by ordering the arrest of senior party officials and former security chiefs. His crackdown is partly aimed at crushing his rivals, partly at shaking up unproductive sectors of the state economy and partly at mollifying popular resentment. But this is a risky project. And failures, like the state-sponsored stock market boom of 2014-15, only weaken his authority in the eyes of his rivals.
However, while Xi and the current leadership have always to look over their shoulders at their rivals in the party, they are much more worried about the threat from the working class.
Wages and workers
The biggest threat to Chinese capitalism is the working class that it has brought into being.
Why don’t China’s rulers simply lift wages and provide a decent social security system, thereby increasing workers’ disposable income and reducing their propensity to save? That would help rebalance the economy by boosting consumption and reducing the excessive bias in the economy to exports and investment.
The answer is not narrowly economic but bears on class power.
Real wages rose in the coastal provinces in recent years as labour shortages began to emerge under the impact of the one child policy and the gradual exhaustion of surplus labour in the rural areas. Municipal governments are also introducing meagre systems of social security because the Communist Party fears the political consequences of growing inequality.
The limit to these developments is given by Chinese government’s need to maintain very high rates of exploitation of the workforce.
Rising wages in China, combined with a currency that has become stronger against the US dollar since 2005, are already encouraging some investors, both local and overseas, to relocate their operations to countries that are now cheaper, such as Bangladesh and Cambodia. This is a threat to the Chinese government and its desire to maximise the rate of accumulation at home.
Further increases in wages or tax hikes on business to pay for social security would result in a growing exodus. Also, many bureaucrats have extensive business investments – they have a personal interest in keeping wages low.
Chinese capitalism is not in a strong position to bear the cost of rising wages because the country lags way behind Western productivity standards and is a long way from developing the kind of advanced industries, outside of the military, that might compete with Western and Japanese rivals in more profitable fields. Overseas ventures by Chinese capitalists have not fared well.
In the long term, productivity can be raised only by capital investment. The problem for the Chinese capitalists is that, as with Japan and South Korea before them, raising the ratio of machinery to workers in China, what Marxists call increasing the organic composition of capital, will put further downward pressure on the rate of profit. And the rate of profit has already dropped since the first half of the 1990s, falling by one estimate from 33 percent in 1985-89 to 26 percent in 2005-09.
The ability of Chinese (and Hong Kong and Western) capitalists to exploit a cheap and ever-expanding workforce probably has reached its limit. The falling profit rate, by undermining the incentive to invest, will drag down China’s growth rate over the coming years.
This is what occurred in Japan and South Korea after they had enjoyed some decades of rapid growth in the 1970s and 1980s respectively. The difference with China is that this process is cutting in when living standards are still well short of where they were at a similar point in the other countries’ development – Chinese GDP per head is still only US$7,500 on a purchasing power parity basis, although this average masks dramatic differences between town and country and between the coastal provinces and those inland.
Chinese capitalists also face the working class, which is gaining the confidence to fight back.
Unlike their parents and grandparents who moved from the villages, the new generation of migrant workers has become accustomed to life in the big industrial cities. They are not cowed any more.
Further, the prospects of social mobility, which drew millions of migrant workers to the cities in the earlier period and which allowed a minority of them to climb the social ladder, have now become more limited. Formerly fluid social and business structures in the rapidly growing coastal provinces have become more congealed, leaving less space for outsiders to break in. Migrant workers are having to accept that if their parents were factory workers, they will most likely stay factory workers too. Their only route to advancement is collective.
As predicted by Karl Marx nearly two centuries ago, the simple concentration of workers in massive numbers – Foxconn, for example, employs 300,000 workers in Shenzhen, Guangdong – has created a new self-awareness of their power. They know that if they go on strike or march on the street, they have power to bring the profit making machine to a halt.
Strikes, which were initially concentrated in the manufacturing heartland of Guangdong, are now spreading out all over the country. China has become one of the world’s leading strike centres.
Working class struggles at the point of production have been accompanied by the struggles of villagers to prevent land being seized for industrial development, by townsfolk fighting against the construction of toxic operations in their neighbourhoods, and by families who have lost loved ones in the many disasters that characterise Chinese society today – the rail smashes, the school collapses, the mine disasters, the ferry sinkings and the mass episodes of fatal food poisoning. The Chinese people know full well that party officials and fat cat businessmen are profiting handsomely from their losses and bereavements.
And if the Chinese authorities gained kudos from three decades of growth, the slowdown in the Chinese economy currently under way threatens to undermine this. The significance of the stock market crash is that, unlike the land grabs, the ferry sinkings and the mine disasters, this new development puts the focus squarely on the government. Such has been the identification of president Xi with the stock market boom that its termination will help to puncture the aura of invincibility built up around “Big Xi”.
As the Chinese government looks for mechanisms to restore growth, it comes up against the problems of the broader world economy, the balance of factional power within its own ranks, its desire to protect its own privileges in an economy premised on elevated rates of worker exploitation, and its need to maintain its legitimacy in the eyes of a working class which is restless.
How the tensions in Chinese capitalism pan out is impossible to predict, but such is the size of the economy and its working class today, that future developments will have repercussions all over the world.