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“China’s economy is going through hard times. The most important expression of it has been the recent successive drops in the country’s main stock markets (Shanghai and Shenzhen). It had previously manifested itself as a Real Estate crisis (with several unfinished projects and other finished ones that couldn’t find any buyers), and a significant growth in construction companies and local government’s credit debts non-payment”.

 Writen by: Alejandro Iturbe.

We reproduce here the first part of Alejandro Iturbe’s article about the current debate of Chinese economy’s role in the frame of the world financial crisis.

China’s economy is going through hard times. The most important expression of it has been the recent successive drops in the country’s main stock markets (Shanghai and Shenzhen). It had previously manifested itself as a Real Estate crisis (with several unfinished projects and other finished ones that couldn’t find any buyers), and a significant growth in construction companies and local government’s credit debts non-payment

The Chinese economy is currently the second worldwide, with over 11% of the world GDP (only exceeded by the U.S.). Besides, it has great influence in the international trade because it is the second country in export volume and the third in import.

Despite the world economic crisis that began in 2007-2008, this economy maintained high levels of growth for several years. During this period, it acted as a “secondary engine” that buffered the deepening of the crisis.

However, this situation seems to be ending. For this year, there is a 7% growth expectancy (a high number for any country, but because of the specific characteristics of the Chinese economy, it means crisis).

This has a strong impact in the overall world economy. Immediately, it implies drops in the most important stock markets worldwide. In a more profound manner, an important drop in prices of food and commodities they import. Along with it, exporting countries enter recession (like Brazil and Argentina).

At last, it has a strong impact in the world economic situation as a whole, as we are still under the influence of the “descendant wave” of the crisis initiated in 2007-2008. In a report presented by the International Monetary Fund to the Finance Ministers and Central Banks of the G20 (published by the Wall Street Journal), they said it is “evaluated that the situation in China, added to other negative conditions in the international context, may lead to a weaker perspective of the global economy.”

Therefore, it is very important to deeply analyze the specific characteristics of the Chinese capitalist model, the genesis of the current situation and, at the same time, consider some hypothesis on the economic and political perspectives. I will try to avoid overloading the text with numbers and statistics, focusing on descriptions and concepts.

From a backward Semi-Colony to a Bureaucratized State

Before the revolution led by Mao Tse Tung in 1949, China was a semi-colonial country characterized by being backward, with a primarily peasant-based economy, whose territory was always plunder for the imperialist powers fought over it (specially Great Britain and Japan). These powers appropriated coast enclaves such as Hong Kong (Great Britain) and Macao (Portugal). To get an idea of the backwardness and poverty of the country, Mao’s great slogan for the revolution was for each Chinese to be able to eat a plate of rice a day.

After the end of World War II and the defeat and expulsion of the Japanese invading troops, the two components of the forces that had managed to free the country fought each other. On one side, the bourgeois sector of the Kuomintang Party (led by General Chiang Kai Shek) and on the other, the peasant-based Popular Army, led by the Communist Party and Mao.

The war ended with the triumph of the Maoist forces. Chiang and the Chinese bourgeoisie fled to the island of Taiwan, where they set up the Republic of China (capitalist), with strong support from U.S imperialism. In the meantime, after seizing power in the rest of the country’s territory, the CP built the Popular Republic of China. By expropriating the bourgeoisie and imperialism, it became a new Workers’ State in the most populated country on Earth.

From the beginning, it was a Bureaucratized Workers’ State, dominated by the dictatorial regime of the Communist Party and its leadership. Within it, Mao had the role of “supreme arbitrator” among the party’s different factions. The political regime didn’t allow any real democratic liberty for the workers. For fifteen years, Maoism was part of the Stalinist world apparatus, hegemonized by the USSR bureaucracy. However, in the 1960s, there was a split between both parties, and Maoism (maintaining its Stalinist matrix) started to build its own world political apparatus.

Despite the bureaucratic and dictatorial character of the State, central planned economy provided very important results. The most important were, without a doubt, ending hunger and deceases caused by chronic poverty. There were also great advances in education and in eliminating the most backward elements of women’s oppression (like forcing little girls to tie their feet to stop them from growing). At the same time, service and communication infrastructure clearly improved and an incipient industrialization process began.

But these advances stemmed from an extremely backward base (that remained agrarian). They also faced two obstacles that set unsurmountable limits.

First, the Stalinist perspective (adopted by Maoism) of the possibility of building “socialism in one country”. Marx had fought this idea (in the XIX century) and in a country as backward as China, it was even more impossible.

The second obstacle was a bureaucratic and arbitrary centralization of the planned economy by the CP leadership, which in many occasions reached a delirious level. That’s  what happened during the so-called Great Leap Ahead (1958-1961), when they imposed the creation of a million “mini-steelworks” in peasant farms. The metal obtained was of the poorest quality and practically unusable, which meant a great loss of effort, work and materials. Another example is the “forced collectivization” of fields (carried out during these same years, based on the Russian Stalinist model of the 1930s) which caused millions of deaths by starvation.

Because of these profound contradictions, planned economy experienced big oscillations, so the Chinese bureaucratic apparatus and its leadership were always very unstable. There were confrontations and permanent displacements among its different factions (for example, during the Cultural Revolution)(1).

The Capitalist Restoration

By the end of the 1960s and the beginning of the 1970s, the country’s economy was stagnated. In this context and in the midst of a debate on how to face the situation, Mao died in 1976. The struggle among factions increased. Finally, in 1978, Deng Xiaoping’s sector triumphed and shot his opponents’ main leaders (known as the Gang of Four).

Deng was an expression of the bureaucracy’s most right wing faction. He began the capitalist restoration process in the country, hand in hand with U.S. imperialism (in 1979, Deng was the first Chinese communist leader to travel to the USA and have an interview with President Jimmy Carter). A symbol of the restoration was that, by the end of 1978, Coca-Cola announced its project to install a  production plant in Shanghai.

Deng implemented two main policies. The first was the elimination of the agrarian production communes, replaced with the “Household Responsibility System” that authorized families to directly sell and make profit out of their own crops. The most dynamic and favored sectors started to accumulate small capital. They began to search new forms of agrarian exploitation (with the approval of the 30-year lease right and the authority to transfer these rights). They also started to invest in small commercial and industrial companies, originating an incipient rural bourgeoisie.

For two decades, this meant the expulsion of millions of peasants who lost their means of support and feeding, and had to migrate to big cities to look for work as wage earners. The process affected over one hundred million people (added to a pre-existing migration due to forced collectivization). That way, an immense and docile “industrial reserve army” was formed. They accepted very low wages and became the social base for great investments and a quick industrialization.

The second measure was the creation of four “free-trade zones” for investments in the cities of the southern coast. The initial objective was to make cheap products for the internal market (textiles and clothes, radios and small steelworks). However, this production quickly started to be exported and compete with the so-called “Asian tigers”.

An Unprecedented Historical Combination 

China’s capitalist restoration has a common characteristic and a different one compared to the process in the USSR and Eastern Europe. The common element is the restoration was carried out by the Communist Party themselves (in the Russian case, it was led by Mikhail Gorbachev). The difference is that in the USSR and Eastern European countries, the mass movement overthrew the Stalinist restoring apparatus (the symbol of this process was the fall of the Berlin Wall). In China, this triumphant post-restoration mass process didn’t happen (by the way, neither it did in Cuba).

So, an unprecedented historical combination occurs: the Stalinist apparatus, that had led the revolution and built the Bureaucratized Workers’ State, restored capitalism and remained in power after doing so. But now they no longer defend the economic and social basis of a Workers’ State, they are in the service of imperialist capitalism.

From a formal point of view and of its mechanism, the regime and its apparatus are still the same: bureaucratic and dictatorial, disguised behind red flags and “socialist” language. However, the social content is completely different now. For example, the number of important cadre and members of the CPC that are bourgeois or belong to bourgeois families is enough proof.

In China, we have what Brazilians call the “worst of all possible worlds”: a bloody “red” dictatorship with one of the fiercest and most exploitative form of present capitalism.

A key fact: the defeat of Tiananmen 

Based on that, Chinese economy grew at fabulous annual rates: in 1988 it reached 12%. But in 1989 it started to slow down and reached only 4%. At the same time, this growth accumulated greater tensions and social inequalities.

Seeking to “unlock” capitalist growth, the government decreed a “general price release”. This caused great dissatisfaction and social turmoil. Meanwhile, new urban more modern middle sectors, that emerged from the recent social development, started aspiring a “democratic opening” the regime was not willing to provide, not even partially.

In the beginning of May, students from Peking University issued a manifesto with democratic demands. A small, incipient and clandestine union federation, with new and independent unions, joined them. Besides the general claims, they demanded the right to free union association.

A massive mobilization process started. The epicenter was Tienanmen Square, where between one and two million people pass daily. The regime was paralyzed. It was trapped between the certainty that this process threatened to undermine its bases, on one hand, and the fear of a face-to-face confrontation with the masses, on the other.

This lasted approximately a month. In the context of Tienanmen, the CP leadership carried out intense discussions on what to do. Once again, Deng’s “hard line” and repressive policy won. The 4th of June, the Chinese army bloodily crushed the movement (imprisoning most of the leaders) and definitely cleared out the plaza.

It was a turning point in the relation of forces and the Chinese political situation that strongly consolidated the “red dictatorship”. At the same time, this implied the beginning of a leap in the foreign investments and the development of the current Chinese capitalist model.

The Chinese Capitalist Model

The stability accomplished by the regime guaranteed the model of capitalist accumulation built in China since the 90s. It combines the following main elements:

a) At its base is the immense proletariat created by the migration of  peasants expelled from their lands, that provides the cheap and super-exploited workforce. And an even greater potential reserve army of labor in the countryside. In the beginning of the XXI Century, each Chinese industrial worker worked, on average, 13 hours per day for a 0.6 dollar per hour salary. This means an average 150-dollar wage per month, although it increased a little in following years.

b) The engine of the model are foreign investments in industrial production. They come directly from imperialist countries, (specially the U.S.) or disguised through investment funds based in Hong Kong, Macao and Taiwan (the latter were responsible for 50% of total investments). Later on, investments  from the new Chinese bourgeoisie, associated with imperialism, were added to this engine.

Captura-de-pantalla-2015-09-17-a-las-16.55.56

[Graphics 3: Evolution of direct foreign investment in billions of US$]

c) The main destination of the industrial production is the worldwide export, specially the U.S. China went from exporting a few tens of billions of dollars in 1978 (less than 1% of world total) to almost 1.8 trillion in 2010 (almost 12%). As we said previously, exports were initially cheap products, then electronic devices  were added, and finally automobiles, machinery and railroad material.

d) Meanwhile, imports of food, commodities and energy grew. This year, they reached over 1.5 trillion dollars (turning China into a big world buyer and favoring the situation of provider economies, such as Brazil, Argentina and Peru). In this context, the trade balance has always been clearly favorable, except between 1996-2000, and in 2010 it reached a peak of 256 trillions.

e) These positive trade balances allowed the Chinese government to accumulate important reserve funds, which were invested in U.S. Treasury Bonds. In 2010, the Chinese State was the main owner of these bonds, with over 1 trillion dollars. This fed the circle of financial speculation in that country and reinforced what we have named “tandem mechanism” between the economies of the U.S. and China.

f) The regime ensured political stability in a dictatorial manner, and set state corporations and conglomerates apparatus (like a sort of “primitive accumulation”) in the service of imperialist investments. It provided the infrastructure for transportation, communication and energy provision.

We have referred to the “tandem mechanism” of the Chinese and U.S. economies. But they are not equal and equivalent “locomotives”. One was the main and dominant (U.S.), the other was subsidiary and dominated (China).

China turned into the “factory of the world” not as a dominant potency, but as a subordinated country in an accumulation model dominated by imperialist capital. From this point of view, the model’s global mechanism is similar to strong semi-colonial countries, like Brazil.

Let’s look at two examples of this subordination:

  1. In 2008, a single U.S. company (Walmart retail corporation) controlled nearly 15% of the Chinese exports (almost 225 billion dollars a year, three times the Argentinian exports). Through different “Chinese” companies, it manufactures numerous industrial consumer goods (like ride-on mowers, to mow the lawn of middle-class gardens) and then sell them in stores of their worldwide chain.
  2. An Apple iPod is sold internationally  for about US$ 400. The giant Foxconn manufactures these and other products in China. But only 4% of that value stays in the country. Imperialism appropriates the rest, through technology and trade chain control.

An Atypical Dependent Capitalism

There used to be important discussions on whether or not capitalism had been restored in China. Currently, this debate is over, and practically all analysts (left or right wing) define it as a capitalist country. In other words, the search of profit by companies is the engine of the economy. The essential base of this profit is  the
surplus value obtained from Chinese workers
 in production. Some currents didn’t acknowledge the restoration at the time, (like the TF- Argentinian PTS) and have now changed their position without saying so, and without explaining their reasons.

It is capitalist because of the accumulation model dynamic that we have analyzed. It is also a dependent capitalism because imperialist capital controls both ends of the process (investments and exports).

However, at the same time it is deeply immerse in (and dependent of) the world market, the Chinese economy mechanism presents a particular characteristic, that almost doesn’t exist in other capitalist economies: a centralized economic planning. This was a sort of “inheritance” from the Workers’ State time, that allows the leadership of the dictatorial CPC regime to have strong political and monetary tools to influence the economy.

Centralized state investment in economy is not new to capitalism. It learned from the USSR some of its economic aspects and tools to set them at its service. For example, the agricultural production in the U.S. is, in great extent, planned. Likewise, in experiences of bourgeois nationalism in several countries (like Argentina, Mexico or Egypt) the State and its policies had a strong intervention in the economy. But in these cases we were dealing with “closed” models, focused on internal trade. In China, planning is in the service of a model that depends on the world market that we have analyzed.

As a result of this profound difference, the Chinese economy is completely subordinated to the law of supply and demand regarding the world market. But internally, this planned and centralized state intervention gave its economy more autonomy in its dynamic.

Monetary and Financial Policy

One of the main elements to understand what we are talking about is the fact that the Popular Bank of China (the Central Bank) controls the monetary-financial Chinese market in a centralized manner. This market has its own very broad base, due to considerable currency reserves, accumulated through highly favorable trade balances. There are national and foreign private banks, but they have a secondary and minor influence.

This allows the Chinese regime to have a qualitatively superior monetary, financial and credit autonomy, in comparison to countries like Greece (whose currency is directly controlled from abroad). Or even countries like Brazil, that have formally autonomous central banks, but they are controlled (in a more direct manner) by international banks, to ensure the remittance of profits to imperialist companies and payment of foreign debt. (It is important to remember that during most of the PT governments, Henrique Meirelles, Bank of Boston’s high executive, was the president of Brazil’s Central Bank).

On one hand, this characteristic differentiates China from other completely semi-colonized countries. On the other, it acquired a central importance after the outbreak of the world economic crisis in 2007-2008. To counteract the negative effects of the crisis (the decrease in foreign investments flow and in the world demand for the Chinese industry), the regime implemented a Keynesian policy (2) of monetary and credit expansion (in many cases, it was oriented towards the real estate market and construction). This artificially maintained growth. It explains how the country managed to maintain high growth rates (although slightly lower than at its peak) and how it acted as a “secondary engine”, that  mitigated the effects of the international crisis.

The Crisis Outbreak

This policy had inevitably to reach its limit, as the world economy did not overcome the descendant wave opened in 2007-2008. Actually, the process gave warning signs several years ago, with situations of overproduction in heavy industries such as steel and coal.

Recently, it became evident due to the burst of the real estate market and construction bubble. Local governments and private construction companies had jointly promoted this sector, with mega-projects to build shopping malls, and luxury office buildings that could no longer find buyers and remained empty. Consequently, this generated a non-payment crisis of loans they had taken to carry out these projects. And as a latest result, the currently ongoing stock market crash.

This Keynesian policy can no longer avoid the negative impact of the world market situation. Last August 9, the Spanish agency EFE reported: “China’s foreign trade, one of the engines of the second world economy, continues to show disturbing signs of slowing down, with a year-on-year 7.3% drop in the first seven months of the year and 8.8% in July, according to the data published by customs today (…). In July, foreign trade suffered a strong 8.8% contraction, compared to the same month last year, with an 8.9% drop in exports and 8.6% in imports, reversing the previous month’s good numbers. (…) January-July exchanges between China and the E.U. dropped 7.6%  year-on-year, and reached 319 billion dollars, while with Japan they dropped 11.1%, reaching 143 billion dollars. On the positive side, trade with the U.S., China’s second main associate, increased 2.7% (to 309 billion dollars) and the one sustained with the Southeast Asian Nations block increased 1.3% (to 261 billion dollars).

Besides the harder situation of the world market, there is also a lower demand in the internal market. According to the New York Times, Caterpillar factory reduced its production when the sales of construction equipment fell by half, during the first six months of the year. General Motors and Ford are reducing car shipments to local dealers.

As an overall result, it is estimated that Chinese economy will grow less than 7% in 2016 (which, as we have said, means “crisis”). Other analysts believe growth will reach 5% and some say real growth will be between 2 and 3% (as the specialized British magazine The Economist). This forecast coincides with an article by Jason Kirby, from Macleans consulting (06/10/2015): “The country’s official “bean counters” sustain that China’s GDP is on the path to a seven percent growth this year (…) The problem is that it has nothing to do with what happens in Chinese factories, stores and homes. Consider this: in the first trimester of 2015, electricity consumption growth in China was only 0.2 %, compared to the same period of the previous year. Based on that metrics, Christopher Balding, an associate business professor at Peking University in Shenzhen, recently suggested that the real growth of Chinese GDP cannot be more than 1-3%”.

There is room here for a deeper analysis of the “Chinese rates” of growth. Particularly after the outbreak of the 2007-2008 international crisis. We have seen that these rates were partially disguised by the State’s support to non-productive investments in the real estate sector. When these investments did not find buyers, they couldn’t recover their value, nor could they realize the obtained surplus value. In Marx’s words, they turn into a no value, although this profound economic reality is not included in the country’s GDP calculation.  As of this, if we consider other indicators, (like energy consumption) growth rates can be placed in a more realistic economic level.