The bourgeoisie has never,
anywhere, been able to find the key to unlock the mysteries of their own
economic system. The only way to understand capitalism is to accept and
to explain its contradictory, crisis-ridden nature. It cannot be
perfected; its riddle will never be solved from within its confines.
Precisely because the apologists of capitalism can never accept this
fact, they are forever shifting from one side of the problem to the
other.
The bourgeoisie has never, anywhere,
been able to find the key to unlock the mysteries of their own economic
system. The only way to understand capitalism is to accept and to
explain its contradictory, crisis-ridden nature. It cannot be perfected;
its riddle will never be solved from within its confines. Precisely
because the apologists of capitalism can never accept this fact, they
are forever shifting from one side of the problem to the other.
Instead
of seeing the whole picture, they respond to economic crises by
abandoning the previous orthodoxy and suddenly embracing its opposite,
which is equally one-sided. The evident failures of ‘monetarism’ and
so-called ‘neoliberalism’ have led many to herald Keynesianism and the
Chinese model as the long sought for answer to capitalism’s ills. A
closer look at the Chinese economy, however, reveals equally deep
contradictions.
Thanks to China’s role as a newly developing economy, with its
abundance of cheap labour, it has in the past 20 years come to be the
new “workshop of the world”, one of the few places where meaningful
investment in the productive forces has taken place. This has led to a
massive current account surplus and vast foreign exchange reserves as
China exports to the West. Thanks to this build up over a twenty year
boom, during the global economic crisis, which threatened to transform
China’s boom into an almighty bust, the Chinese state was in the
unrivalled position of being able to embark on a huge Keynesian fiscal
stimulus to keep the factories producing.
this temporary measure has served only to suppress, whilst also
exacerbating, the underlying problem – the anarchy of the market and the
looming crisis of overproduction that this leads to. Because Keynesians
– and the Chinese state is following a Keynesian policy – leave a large
part of the economy in private hands interested in producing solely for
profit, the state led fiscal stimulus produces inflation and enormous
speculative bubbles. Since the cheap money from the state’s coffers
comes with no strings attached (where there are strings, as we shall
see, the pressures and laws of the market will find it necessary to
break them), it does nothing to make its private recipients invest in
the useful production that society needs.
If these private companies were hitherto holding back investment and
laying off workers, as they were in China in the aftermath of 2008,
there was a good reason for it, which is that there is a limit to the
amount of cars, clothes, computers etc., that the capitalist market can
absorb, owing to the poverty of most of the world’s consumers. This
problem does not go away because the central government is lending some
money. The “limited demand” of the global market remains. Therefore if
the state in its desperation drowns these companies in cheap credit,
they will not use it to build bigger factories making more products they
cannot sell, but will spend it on useless speculation.
This is precisely the situation in China today. In 2008 China’s fiscal stimulus did help to avert a global depression, but only temporarily and at the cost of a worse crisis in the future.
Recently the strategists of capital, and the Financial Times in
particular, have drawn attention to the all-too-familiar signs of
impending catastrophe. In an article titled “China Groups Fuel Growth of Shadow Banking” by Henny Sender, we read that,
“More than a quarter of pre-tax profits at China’s Yangzijiang
ShipbuildingHoldings in the second quarter came from an unexpected
source – not its core shipyard business, but from lending money to other
companies.
“In a similar vein, China Mobile has set up a finance arm to lend
money, while PetroChina already has a number of financial vehicles in
place.
“They are part of a growing number of Chinese companies using excess
cash to fund indirectly the country’s shadow banking system as Beijing’s
monetary tighteningmakes it more difficult for small and medium-sized
firms to access the formal banking sector. (…)
“Foreign firms with cash balances in China are contemplating similar
operations, according to Jason Bedford of KPMG in Beijing who advises
foreign multinationals, including German and Japanese conglomerates.
‘Many have a large build-up of yuan that can be difficult to
repatriate,’ he notes.”
other words overproduction is unavoidable. Firms, including so-called
“State Owned Enterprises”, who operate in accordance with the principle
of maximising profit in the market, have more cash than they know what
to do with. This is the logical outcome of capitalism, where more and
more wealth is concentrated in fewer and fewer hands.
Where is this excess cash, which has been irresponsibly inflated by
the central government by forcing cheap credit onto firms, going? Just
as in the Western credit binge that fuelled the sub-prime mortgage
crisis, this excess cash is put to work in speculation, unproductive
financial jiggery-pokery, schemes that merely shift money from one place
to another and benefit only the middle-man. And as in the West, this
speculation inevitably tends to gravitate towards property speculation.
According to Jamili Anderlini in the Financial TimesTimes
property investment now “accounts for more than 20 per cent of total
fixed investment in China and UBS estimates almost 30 per cent of final
products in the economy are absorbed by the property sector.” According to the Economist, “60% of informal loans now go to small time property developers.”
In 2008-9, when the worldwide crisis led to a significant contraction
of China’s export market, China “saved the world” by embarking on
$586bn fiscal stimulus that was in truth an irresponsible credit binge.
But the strategists of capital always behave irresponsibly when they are
staring into the abyss and see no alternative. It is well known that
only just under one third of this figure was actually delivered directly
by the central government. The rest was delivered through local
governments who lent the money to the “state-owned” (but not state planned)
enterprises to build housing, infrastructure, etc. But because these
state-owned enterprises operate on the principle of profit in a market,
much of the excess of cheap credit, as in the cases of Yangzijiang
ShipbuildingHoldings, China Mobile and PetroChina mentioned above, has
been used for speculation, creating a property bubble and a whole shadow
banking system which serves the state-owned enterprises in their quest
for profit. As we know only too well, lending at usurious rates to fund a
property bubble is not sustainable and inevitably leads to an even
bigger crash.
has led not only to an out of control property bubble, but an extremely
convoluted chain of debts which the local authorities are now
completely sucked into. According to a Financial Times Editorial of October 24th 2011
the “official estimates [of local authority debt], which are disputed,
show this figure to have trebled since 2007. In 2010, it reached
Rmb14,000bn ($2,194bn), or 35 per cent of the country’s gross domestic
product.” This would take China’s total public debt to around 55%
(including central government debt). This local authority debt accounts
“for up to 30 per cent of all outstanding bank loans, many of which are
collateralised by land and housing developments” (Jamil Anderlini, op
cit.).
The transformation of “state-owned enterprises” into profit making
firms leads to the undermining of the central government’s ability to
control what happens in the economy, as in any other capitalist economy.
The official state banks, as part of the fiscal stimulus, have been
lending out at artificially low interest rates to the favoured
state-owned enterprises to encourage spending. But in order to exploit
their favoured access to cheap credit and increase their profits without
any actual recourse to production, they have tended to “illegally”
create a shadow banking system in which they lend out to small
businesses at far higher interest rates(what they can and can’t get away
with is vague and political). The same Henny Sender article quoted
above says the following:
“At the same time it [funding shadow banking] allows the companies – some estimates say 90 per cent of the shadow lenders are state-owned – to make healthier returns than they could by leaving the cash on deposit [i.e. with the official banks].(…)
“The country’s regulated interest rates mean that borrowers in the
official sector can obtain money at artificially low rates while less
favoured borrowers have to pay far higher rates in the grey market.
“PetroChina has an asset management arm, a trust bank, a commercial
bank as well as an internal finance unit. Baosteel Group has a 98 per
cent stake in Fortune Trust, one of the largest trust firms, while Hunan
Valin Iron and Steel Group has a 49 per cent stake in Huachen Trust.
“Mr Windham notes that most of these investments are less than a year
in duration and collateralised with shares and property. It earns
anywhere from 10 per cent to 15 per cent on these investments, far
higher than the deeply negative real interest rates it would receive on
bank deposits.”
The rise in inflation that the credit binge of 2008-9 has led to is
now forcing the Chinese government to restrict access to credit in an
attempt to reign in the bubble. But the whole point is that one cannot
control the anarchy of the market; their previous attempts to do so have
led directly to the present problems. Thanks to the massive boost to
financial speculation they gave the system in 2008-9, the reigning in of
cheap state credit only has the effect of boosting the unregulated
shadow banking system (since businesses cannot get credit from
elsewhere) to the point where it is now supplying more credit to the
economy than the official banks do!
Moreover, the apparently state controlled banks are themselves
leading this process by setting up their own unofficial banks! According
to Simon Rabinovitch
“Industrial and Commercial Bank of China, the world’s biggest lender by
market value, previously disclosed that it sold nearly Rmb2,780bn of
wealth management products [these are loans they set up to get around
the state cap on interest rates and restrictions on lending] in the
first half, more than triple the Rmb902bn in new deposits it attracted
over the same time.” In other words, not only are the state’s own banks
circumventing state restrictions, but they are lending out three times
as much as they receive in deposits. This process is explained well by James Kynge:
“the most profitable activity by state-owned banks in the first half
of this year was not lending to businesses but funding trusts and
underground banks, bank financial reports show. Still, it is
understandable that banks would wish to maximise profits, especially at a
time when deposits are draining away. In the first 15 days of
September, for instance, the ‘big four’ state banks suffered a net loss
in deposits of RMB420bn – more than four times their lending in the same
period – as savers fled to high-yielding shadow banks.”
According to the Economist,
“off-balance-sheet lending added about 10.7 trillion yuan ($1.7
trillion) to the 54.7 trillion-yuan worth of loans on banks’ books in
June… Informal lending, properly defined, amounts to about 4 trillion
yen, Credit Suisse estimates.” What is interesting here is the way in
which the logic of the market erodes state control over even the
state-owned enterprises. The central government is now allowing local
authorities to issue bonds for the first time since 1994. In other
words, so worried are they about the immense exposure to the property
bubble that the local authorities have, they are now compelled to offer
up their financing to private financiers by selling them bonds. In
addition “they [local authorities] have begun to sell off prized
corporate assets at an unprecedented rate. Local units of the State
Assets Supervision and Administration Commission sold off RMB3.31bn in
corporate assets between January and July this year, up from RMB2.35bn
in all of 2010” (James Kynge, op cit.)
China Daily reports that “China placed limits on salaries in 2009 – 2.8 million yuan [about $440,000] for executives of State-owned enterprises – but the policy seems to have been ignored… The highest paid CEO at a State-owned enterprise
is Han Junliang, who was paid 8.58 million yuan by Sinovel Wind Group
Ltd this year… ‘The payments of CEOs do not just depend upon their
performances. It’s also decided by the market,’ says Jennifer
Feng… The government has allowed State-owned enterprise executives to
hold and sell a small percentage of their companies’ shares since 2005.”
The Chinese are learning that you cannot regulate capitalism.
The restriction of access to cheap and free flowing credit has also
had unintended consequences on the government’s “plan” (in reality a
guideline, as the state now calls its five year plans) for railway
construction. Its own state owned railway company, China Railway Engineering Corporation,
has not paid its migrant workers for months due to a lack of access to
credit, underlining the lack of state control even over its own
companies, which are evidently pushed by the state to meet targets and
make profits in whichever way they see fit; if that involves the
super-exploitation of migrant labour to survive sudden restrictions on
credit, so be it.
As always in a bubble, a huge proportion of the debts will turn out
to be bad debts, just as with the US sub-prime mortgage scandal, since
bubbles are by definition an attempt to overcome the market’s limits,
which cannot be done. As we have already seen, the rise in inflation it
has produced is now forcing the government to scale back lending. But
this in turn is leading to falling property and land sales, falling
property prices and the resulting risk of bankruptcy for all those
property speculators borrowing at such high rates from shadow banks.
That in turn can push the vast network of unregulated credit, intimately
tied up with State-owned enterprises and local-authorities, with their
$2tn+ of outstanding debt which is collateralised against precisely the
same falling land prices, into a Chinese credit crunch.
This is how George Magnus, senior economic advisor at UBS bank, puts it:
“Property developers in China are faced with a fall in prices and
transaction volumes, which in 20 big cities are about a third lower than
a year ago.(…)
“Local governments have significant exposure to property values and
collateral and are heavily indebted with liabilities of at least 30 per
cent of GDP. Many are facing cash-flow problems and are prone to
default, with large refinancings and repayments due in the next two
years. Some Rmb3,000bn ($470bn) of bad local government loans, or 8 per
cent of GDP, are being scrutinised by regulators and the National Audit
Bureau. A spate of failed land auctions, falls in land transactions and
weakness in property prices could have far bigger consequences for
China’s capitalist model.”
If there is a Chinese credit crunch, which could be sparked off by a
financial crisis emanating from Europe, no doubt the Chinese state will
bail out the local authorities and state-owned enterprises using its
pool of money. But not only will that, just as in the west, only worsen
the problem in the long run, which is after all the problem of the
capitalist system, but it will also mean they will not be able to pump
prime the economy again. They will be left to weather the storm of
financial catastrophe and recession along with the rest of the world.
When that happens, no amount of state repression can stop a fourth
Chinese revolution.
