From exports to investment: contradictions in the Chinese economy intensify

The picture of the Chinese economy painted by commentators in the West is often one of strength; an economy dominated by exports, with unstoppable growth and development; in short, a model to emulate. Recent figures released by the International Monetary Fund, however, describe a very different situation; a situation where contradictions are intensifying below the surface; a situation that is pregnant with crisis and revolutionary consequences.

In previous articles, we described and analysed some of the contradictions and limitations facing the “Chinese Model", such as the accumulation of local government debt and the looming crisis of overproduction facing the economy. In their recent report on the Chinese economy (which was written in association with the Chinese authorities), the IMF provide facts, figures, and statistics that emphasise the points that we previously highlighted.

However, in addition, the IMF report demonstrates that the Chinese economy has reorientated away from the export-led growth that it has been famous for, and is now heavily based on internal investment. Such investment paves the way for a new, greater crisis in the economy, as the IMF themselves recognise.


As we have explained previously, in the thirty year period following the “market reforms”, which were first introduced by Deng in 1978, capitalist relations in China became increasingly strengthened. A pivotal point in this capitalist restoration was in 2001 when China joined the World Trade Organisation. Joining the WTO meant giving up state control of foreign trade, opening China up to the world market. This breaking down of the Chinese walls resulted in a large investment boom as foreign capital flooded into China. In addition, the admission of China into the WTO gave businesses in China increased access to the world market for their exports.

The use of joint ventures, in which multinational firms were allowed access into China on the condition that they do so in partnership with Chinese state companies, was used to strengthen these Chinese companies to the point whereby they could compete on the world market. In doing so, Chinese companies were also able to acquire foreign technology on the cheap, thus paving the way for a massive expansion of China’s productive apparatus.

Between 2001 and 2008, the Chinese economy grew at a tremendous pace, largely thanks to exports. Growth of over 8% of GDP per year was seen throughout this period, and by 2007 growth had reached 14.2%, with net exports accounting for almost one fifth of this growth.

Over the same period, huge numbers of people flocked from the countryside to the cities and the productivity of labour exponentially increased as a greater quantity (and better quality) of machinery was put at the elbow of each worker. According to a recent special report on the Chinese economy in The Economist (May 26th 2012):

“From 1990 to 2008 China's workforce swelled by about 145m people, many of them making the long journey from its rural backwaters to its coastal workshops. Over the same period the productivity of the workforce increased by over 9% a year, according to the Asian Productivity Organisation (APO). Output that used to take 100 people in 1990 required fewer than 20 in 2008. All this meant that growth of 8-10% a year was not a luxury but a necessity.”

This vast expansion of industry in China created an equally vast mass of commodities that had to find a market. “Excess capacity” (i.e. overproduction) was seen across the economy, but especially in industries such as cars, construction materials, and steel. With the Chinese currency (the “yuan”, or “renminbi”) and labour costs held low, these commodities were exported abroad to markets in the USA and Europe, and profits flowed both to the multinational firms that had set up shop in China and also to the newly strengthened Chinese companies (both state-owned and private).

By 2007, China registered a huge trade surplus with the rest of the world, at 9% of Chinese GDP (equal to approximately US315bn), which contributed towards a current account surplus of 10.1% of GDP (the current account of a country is a measure of the flow of goods and services – i.e. the value of commodities – that crosses the borders of a country). But such export-led growth was extremely fragile, and this fragility was exposed by the onset of the global crisis in 2008.

Crisis and stimulus

As a result of the 2008 crisis, demand for Chinese exports in the key markets of the USA and Europe contracted significantly The Chinese authorities responded in November 2008 by implementing a vast government stimulus, much of which was on large-scale infrastructure projects, construction, and property, which gave a large impetus to increased quantities of imports into China, especially of raw materials. This combination of declining exports and increased imports has led to a reduction of the current account surplus to only 2.8% of GDP. In fact, rather than contributing to economic growth, since 2009 net exports have actually detracted from growth.

Much of this investment and stimulus by the Chinese government in 2008 was fuelled by credit, in the form of loans to fund local government projects. Lending rose from 122% of GDP in 2008 to 171% in 2010, a larger increase of credit than that seen in the USA in the run up to the financial crisis of 2007.

Whilst the government stimulus may have temporarily saved the Chinese economy from the effects of the global crisis, the rise in credit has gone hand in hand with a rise in local government debt and an increase in financial risk, especially as much of the lending has been done in the shadows of the economy. As the IMF reports:

“The side effects of the last stimulus are still winding their way through the economy. As a result, there is a clear risk of deterioration in bank asset quality, which would be amplified in a low-growth scenario.”

The IMF report continues:

“The authorities’ strong response to the last crisis helped maintain robust growth in China and provided needed support to the global economy. It also relied heavily on a large expansion in bank credit – especially to local government financing vehicles – which is now raising concerns about bank asset quality, the size and efficiency of investment, and the financial health of some local government entities.”

Chinese ghost townChinese ghost townIn addition, the government stimulus has led to an enormous property bubble in China. In order to find an outlet for their savings, wealthy Chinese have “invested” in property, the result being whole developments that lie empty without any inhabitants in sight. Both the IMF and the Chinese authorities are all too aware of the problem. According to The Economist (July 28th 2012), “It [the property bubble] remains the biggest fear hanging over the world’s second-biggest economy.”

However, the Chinese government is equally wary of the impact of bursting the bubble, due to the knock on effects that this would have. Many other sectors within the Chinese (and international) economy rely on the demand from construction, and a slowdown in house building would have a severe effect, as the IMF reports:

“Real estate investment accounts for a quarter of total fixed asset investment in China...

“...Following a decline in real estate investment, activity would fall in a broad range of sectors, given the real estate industry’s strong backward linkages to other domestic industries (such as consumer durables, construction, light industry, electricity). Weakening domestic demand would depress China’s imports and, in turn, impact trading partners’ production, employment and domestic demand.”

Global interconnectivity

What this particular example highlights is the extreme interconnectivity of the global economy. Not only is China reliant on the health of the economies in the West (e.g. exporting to the USA and Europe), but, in turn, the rest of the world is reliant on Chinese demand. According to the IMF:

“Assuming no policy response in China, growth could decline by as much as 4 percentage points in response to a 1.75 percentage point slowdown in global growth.”

And this slowdown in China would have an impact on several other important countries, which have built their economies around exporting basic commodities to China, such as coal, oil, steel, and food, as well as more valuable capital goods, i.e. machinery; as the IMF states:

“The combination of China’s reliance on investment for growth and its growing footprint of commodities and capital goods imports leave several economies exposed to a slowdown in China’s fixed-asset investment. The growth impact would be significant for G20 economies such as Japan, Germany, Canada, and Brazil.”

Many other countries could be added to this list, such as Australia and several African economies, which have seen their economies grow on the back of a commodity export boom to China, whose investment led growth has sucked up raw materials from across the globe, leading to increased prices that have contributed towards inflation.

These statements by the IMF debunk the myth of “decoupling”, put forward by many in the naive hope that the crisis in the USA and Europe would not affect the emerging economies, such as Brazil, or the industrialised nations, such as Australia, that have seen consistent growth over the last few years, despite the crisis. As Marx and Engels long ago explained in the Communist Manifesto, capitalism has created a world market; a system in which the fate of each nation is dependent on every other.

Investment and overproduction

As a result of the 2008 stimulus, investment now accounts for almost 50% of Chinese GDP and for a majority of the growth in GDP. But unlike the investment boom that followed the admission of China into the WTO in 2001, which was primarily due to an influx of foreign direct investment into new factories and production, based around the export-dominant coastal areas of the country, this latest investment boom is, in essence, a giant Keynesian experiment. As The Economist special report highlights:

“The post-crisis investment boom was also different from the post-WTO one. It was weighted towards inland provinces, far from the seaports that ship China's goods to the rest of the world. Inland China's share of fixed-asset investment matched that of the coastal provinces for the first time in 2009, then exceeded it in 2010. The investment boom in 2009-10 was also concentrated in infrastructure and property. Neither can be traded across borders.”

As the example of empty properties indicates, a significant part of this investment has been unproductive, yet again emphasising the Keynesian nature of the investment – i.e. government stimulus to artificially maintain effective demand and thus delay the crisis.

Nevertheless, much of the investment has been productive and has contributed towards increasing the local and global crisis of overproduction. This serves to point out the major contradiction inherent within the Chinese economy: by delaying the crisis today through investment and stimulus, the Chinese state is simply preparing the conditions for an even deeper crisis in the future.

According to the IMF report:

“China has had excess capacity for most of the past decade. The gap was closing in the run-up to the financial crisis, but did so based on an unsustainable level of external demand...”

“...By most standards, including a cross-country comparison and the historical experience of other fast-growing economies, China’s investment is very high. Approaching 50% of GDP, investment has been sustaining China’s high growth and is creating large excess capacity in the economy, with the capacity utilization rate declining from just under 80% before the crisis to around 60% today...”

“...Maintaining high investment will add to overcapacity and thereby create problems over the medium term... persistent overcapacity could lead to deflationary pressure, a rise in bankruptcies, and large financial losses. It could also drive up exports and depress prices to maintain high global market shares in a range of products, which could trigger retaliatory trade action... under this scenario, a sharp correction in investment would become inevitable, with significant negative implications for growth and employment...”

“...It [investment] is also leading to excess capacity that could result in problems down the road if domestic and global markets are unable to absorb the output, leading potentially to trade frictions, price declines, bankruptcies, and a worsening of bank asset quality. This model, therefore, is not sustainable.” (our emphasis)

To put this in perspective, a capacity utilisation rate of 80% means that the equivalent of 20% of the productive forces – e.g. two in every ten factories – are lying idle. A decline of capacity utilisation to only 60% means the equivalent of four in every ten factories lying idle.

This demonstrates the extreme crisis of overproduction facing the Chinese economy. The vast mass of wealth that is being produced by the low paid, super exploited workers in China cannot be absorbed by these same workers and must find an outlet somewhere. For years this was achieved by exporting to the USA and Europe – whose debt-fuelled consumption was equally unsustainable. Now the recent attempts to overcome this contradiction of overproduction – a contradiction that is inherent within the capitalist mode of production and the system of private property that it is based on – can do nothing but exacerbate the contradictions, delaying the crisis and paving the way for an even bigger crisis further down the line.

“Rebalancing” the economy

Faced with such a problem, the IMF proposes one simply sounding solution: “rebalancing” the Chinese economy. In other words: reducing investment; keeping exports down; and increasing internal consumption. In order to do this, the IMF proposes a few measures, such as increasing public spending on welfare (e.g. pensions, healthcare, and education), ensuring that the social and environmental impacts of production are taken into account (e.g. taxing pollution), and opening up the Chinese service sector to competition (e.g. in utilities and banking).

There is a strong sense within this IMF report that these suggestions and recommendations are made not so much in the interests of the Chinese economy, but in the interests of global capitalism (whose interests, after all, the IMF are designed to represent). Many foreign firms would very much like to gain greater access to the Chinese market – including both selling to Chinese consumers and buying up Chinese companies – and would like to see Chinese businesses competing on a “level playing field” on the world market – i.e. reducing the competitiveness of Chinese capitalism by ensuring that Chinese firms pay higher wages to their workers and that they are forced to pay the same additional costs (e.g. for pollution and waste) that regulation in the USA and the EU demands.

In essence, what the IMF (and many other similar commentaries) are suggesting is not so much a rebalancing of the Chinese economy – away from exports and investment, and towards greater internal consumption – but a rebalancing of the global economy, in which the Chinese internal market is expanded so that the crisis-ridden nations of the West can export their problems elsewhere.

The same refrain is also frequently heard within the EU: “Germany must reduce its trade surplus and increase its internal consumption.” But both the Chinese and the German capitalists have their own interests, separate from those of the capitalists in the rest of Europe and the USA, and will not be so keen for any “rebalancing” of their economies. This highlights the other great contradiction of capitalism, the contradiction of the nation state, which, alongside the ownership of private property, hems in the productive forces and the development of society.

In the final analysis, any “rebalancing” to create greater internal consumption would require an increased share of the country’s wealth to go towards wages – which form this internal market –and a decreased share to go towards profits. In other words, the wealth of a society must fall to one of two camps: the working class or the capitalists.

But this process is not happening in China. According to the IMF, “corporate profit ratios have been rising on average... Recent data suggest that while profit margins may be weakening in some sectors, they continue to remain healthy on aggregate.”

Whilst wages have been increasing in real terms (in many cases due to the increased militancy and organisation of the Chinese working class), the wealth being produced has increased even more dramatically, meaning that workers are not receiving a greater share of the country’s wealth overall, as the IMF reports:

“In the labor market, official data show wages growing at an average 15 percent over the past couple of years. Wages have been rising faster in inland provinces as more companies relocate there from the coast. However, the rise in aggregate wages has been only marginally above that of productivity, and the available data suggest that the household income to GDP ratio is not yet on a firm upward trend.” (our emphasis)

The IMF continues:

“...the reduction in the current account surplus to date does not yet represent the ‘rebalancing’ in China advocated by staff over the past several years. In particular, there is little evidence, as yet, of a decisive shift toward consumption... This raises concerns related to the sustainability of the recent decline in the current account surplus and the risk of growing domestic imbalances.

“...With growing excess capacity and demographic shifts around the corner, time is running out on the current growth model.”

Explosions on the horizon

All of the signs point to an impending economic implosion within the Chinese economy. But more important is the social explosion that will result from this – and which is, in fact, already occurring, as demonstrated by the increasing level of strikes and demonstrations, including the recent protests in the eastern city of Qidong.

The expansion of industry in China has occurred at a tremendous rate over the past decade; but this has been accompanied by an equally vast expansion of the working class, as millions have moved from the countryside to the cities. A whole new, fresh, militant layer of workers has been created, not only in the previously industrialised coastal urban areas, but now also in the inland provinces. As Marx and Engels explained, capitalism creates its own gravediggers.

All the conditions are being prepared for a gigantic revolutionary movement of the Chinese working class – the most powerful working class in history. Such a movement will change the global balance of forces in a way that will make the Chinese revolution of 1949 look like a mere rehearsal. The growth of China’s industrial apparatus has been phenomenal in the recent decades. But in the words of Leon Trotsky, it has dynamite built into its foundations.

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