3 August 2004 China
Is China heading for a crash?
Rapid economic development over 20 years led some commentators to claim China could deliver sustained global growth. But it has started to falter, and risks becoming a destabilising factor in the world. And the dramatic growth has created vast inequalities within this vast country.
Laurence Coates, Sweden
China, for two decades the world’s fastest growing economy, has become a major force in the global economy. But as the ostensibly ‘communist’ regime in Beijing struggles to put the brakes on an economy which is experiencing an extreme form of overheating, euphoria among the capitalist class internationally has given way to nervousness. As Steven Roach, chief economist at investment bank Morgan Stanley, warns, "the world may be unprepared for the impact of a Chinese slowdown".
Last year, according to official statistics, China’s gross domestic product (GDP) grew by 9.1%. For years, independent economists have viewed official Chinese statistics with scepticism, believing them to be exaggerated. Today, many believe the figures understate reality – the economy may have grown by 11 or 12% in 2003. One reason for the discrepancy is that city and provincial governments are playing down local growth data in order to avoid penalties from Beijing aimed at reining in overheated sectors such as property, steel and cars.
Investment in new steel capacity rose by 87% last year and total output is set to double – again – in two to three years. The director of a stainless steel mill on the Yangtze river, owned jointly by South Korea’s Posco and China’s largest private steel company, Shangang, told the UK Financial Times: "Do you realise, that in a few years this complex alone will be making as much steel as the whole of France?"
The steel sector is an example of the uncontrolled expansion of capacity taking place throughout the economy, much of which is ‘blind’ or ‘duplicative’ according to the government. This is creating huge imbalances: chronic shortages of electricity, water and raw materials. Blackouts, often forcing factories to halt production, are commonplace even in the most developed cities.
Despite huge investment in recent years, road, rail and port capacity is overloaded. These shortages are being exploited by capitalists and corrupt officials for huge speculative gains. Shipping costs for freight in northeast Asia rose by 400% last year on the basis of surging Chinese orders, with scrap metal, coal and iron ore for the steel industry accounting for half this sea-borne traffic.
While mining and energy transnationals made bumper profits from the Chinese boom, other branches of the world economy have been squeezed by higher prices for raw materials. Just months after President Bush lifted his controversial tariffs on steel imports, there are calls from US industry for ‘export tariffs’ to stop all the steel leaving the country!
Another 20 years?
In December 2003, Martin Wolf in the UK Financial Times asked: "Can China continue to grow at anything close to current rates for another two decades, or even more? The answer", he added, "is a resounding Yes". This echoes the prevailing view of the Chinese regime. Recently, however, media comment on China has struck a more cautious tone.
Signs of overheating are unmistakable: an explosion of credit; rampant overcapacity (nine tenths of manufacturing goods are in oversupply); and the return of inflation (2.8% in the first quarter of 2004). President Hu Jintao, and his prime minister, Wen Jiabao, have assured financial markets that ‘resolute’ measures are being taken to rein in excessive investment and engineer a ‘soft landing’ for the economy but, so far, with no discernible impact.
"China is in a situation of severe over-investment", noted Credit Suisse First Boston’s Hong Kong office. What’s more, this investment is chasing diminishing returns. According to The Economist, China currently needs $4 of investment to generate each additional dollar of annual output, compared with $2-3 in the 1980s and 1990s.
Ominously, China displays many features of Asia’s ‘tiger economies’ in the period leading up to their spectacular crash in the summer and autumn of 1997. Last year, fixed asset investment accounted for an unprecedented 47% of China’s GDP, with the construction sector accounting for half this figure. By comparison, in 1992-96 fixed asset investment in South Korea, Thailand and Indonesia averaged 40% of GDP, still extremely high by international standards. In the same period, Indonesia, Malaysia, Thailand and the Philippines experienced money and credit growth rates of 25-30% a year. China’s money supply grew by 20% last year, and bank credit (new loans) by 56%.
The main problem in the case of the ‘tigers’ was that their exports became uncompetitive on world markets just as this new industrial capacity came on-line. The sharp rise of the US dollar in 1995, to which most Asian currencies were linked, priced them out of world markets.
China, although it exports 25% of national output, is less dependent on the world market. The super-Keynesian measures of the government – implemented in response to the Asian crisis – to boost demand by slashing interest rates six times since 1997, and by financing huge infrastructure projects, have increased the specific weight of the home market. But this market is chronically oversupplied.
Workshop of the world
China is now the world leader in many branches of manufacturing, including cellular phones, colour TVs and computer monitors. Since the start of its global export offensive 20 years ago, manufacturing industry in China has shifted from low-tech sectors like textiles, toys and simple manufactures to computers and electronics which now account for 60% of exports. Reflecting the increased role of high-tech production, China accounted for 14% of global semiconductor consumption in 2003. Also, perhaps more surprisingly, 16 million manufacturing jobs have actually disappeared since 1995, as Chinese industry has upgraded its technology. Shanghai Baosteel Group, for example, the world’s sixth largest steel producer, cut its workforce to 100,000 from 176,000 five years ago.
As industry in the southern and eastern provinces has become more capital intensive, low-tech production has shifted to the poorer (and cheaper) inland provinces. This right now is where there is greatest resistance to government attempts to curb new investment.
China still lags behind the advanced capitalist countries in the application of new technology, but the gap is closing. A million engineering graduates leave Chinese universities every year and there is an ongoing transfer of technology from the huge network of foreign partnerships and joint ventures. A survey by the Japanese newspaper, Nihon Keizai Shimbun, based on interviews with 350 Japanese corporations, concluded that, "in the field of technical development China would catch up with Germany and Japan within ten years".
China’s integration into the capitalist world economy means that huge swathes of US and European industry are now dependent on components or finished products from Chinese factories. "In a crisis", warned Ted Dean, managing director of consultancy firm, BDA, "Chinese labour could become as destabilising a force for the world economy as oil prices".
Profits squeezed
These indisputable facts are often cited by capitalist commentators to present a picture of unstoppable economic progress: a 20-year Chinese boom. This ignores the laws of capitalist economy which, as its Stalinist centrally planned economy is dismantled, play an increasingly dominant role in determining the rhythm of the Chinese economy.
The telecom industry is an illustration of this. With 282 million mobile phone subscribers, China is the world’s biggest market. But growth rates are already slowing, with fewer new subscribers in the first months of 2004. Overproduction – too many phones chasing too few buyers – has caused prices to plummet, which in turn squeezes profit margins. The Economist survey on China (20 March 2004) pointed out: "China has 40 mobile phone makers selling over 800 models. Annual demand should rise from 80m units to 100m in the next two years, but supply will double to 200m".