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.
But 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.”
In 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.
This 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 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.
“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.