Will China Beat the US?

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China's embrace of the market is cited as evidence that this is the model for Third World countries. Chris Harman looks at the reality behind the hype.

China is suddenly at the centre of discussions over the development of the world economy. This is not surprising. It has been undergoing sustained economic growth for more than two decades, escaping the slump which hit the other 'newly industrialising' economies of East Asia in the late 1990s, and is now the world's biggest steel producer. Its exports have grown from about 1.2 percent of the world total in 1980 to about 5 percent today (about the same as Britain's). Continued growth by an average of 17 percent a year is leading some commentators to call it the new 'workshop of the world', predicting it could overtake the US as an exporter by 2010 (Martin Wolf in the Financial Times, 12 November 2003).

This growth is now drawing in foreign capital investment at an escalating speed, so that it now gets more from the US than does Mexico, despite that country's membership of the North America Free Trade Area. At the same time raw materials to feed its growth are turning it into a major customer for capitalists in countries like Brazil and reducing their dependence on the US and the European Union (each of which have imports of about $14 billion a year from Brazil). 'China was Argentina's biggest export market in June and July, and Brazil's exports to China jumped 136 percent to reach nearly $3 billion in the first eight months of 2003' (Financial Times, 26 September 2003).

Industrial success

Chinese industry's success on world markets has gone in step with its reintroduction of many of the classic mechanisms of market capitalism - with stock exchanges, the measure of industrial success through profit figures, and a free hand for foreign direct investment. This challenges what used to be taken as an article of faith by much of the left (although, interestingly, it never figured in the writings of Lenin and Trotsky) - that Third World countries could not develop economically while linked to the world capitalist system.

The ideologists of neoliberalism have seized on this, claiming China's embrace of the market is an example for other parts of the Third World to follow. Supposedly countries have only to finish dismantling state control and they too can boom, overcoming the massive poverty of their peoples. This argument has three major faults.

The success of Chinese market capitalism in the last two decades has only been possible because of the previous three decades of state capitalism. As with the two most important East Asian tigers, South Korea and Taiwan, state direction was used to build up basic industries while massive repression kept living standards down. Successful entry into the world market would not have been possible without this prior period of 'primitive' accumulation of capital.

Nothing about this was to do with socialism in the real sense of the word. In a very poor country, where most people never lived very far from the edge of outright hunger, around 30 percent of the national income went towards the building up of industry, often very inefficiently, and to defence. The burden placed on the mass of the population was enormous - at its highest point, during the 'Great Leap Forward' of the late 1950s, resulting in some 20 million deaths through famine. And the burden could only be enforced through all the paraphernalia of totalitarianism and the cult of the personality, culminating in the witch-hunts of the 'Cultural Revolution' period depicted in books like Wild Swans.

Without the growth of heavy industry that rested upon such horror, the success of China's exporting industries from the late 1970s onwards would have been impossible. They have depended upon the old state industries of the north to provide cheap and plentiful inputs to the new private (often supposedly 'co-operative') industries of the coast regions of the east and south east.

Secondly, the neoliberal exaltation of Chinese 'development' ignores its unevenness (as do many statist models of development). As well as the modern urban centres with their skyscrapers there are still hundreds of thousands of villages where people live on the breadline. The World Bank estimates that 204 million people - one in six of the population live on less than one US dollar a day. Most of these are in the villages. Even in villages relatively close to large cities there can be acute poverty, as was shown a couple of years ago by the Chinese film about a village school, Not One More. Away from the centres of trade and industry, conditions can still be horrendous.

So one report by Yu Jianrong, a researcher at the Chinese Academy of Social Sciences, says, 'The officials of towns and villages use their power directly and indirectly to serve their private interests, accept bribes, blackmail and extort, feast and binge on alcohol - thereby creating strained relations between officials and the people.'

One farmer in Henan listed the taxes and fees he has to pay - one each for village upkeep, for public interest, for administrative costs, for education, for charities, for militia training, for road repairs and for family planning. Lastly there was a fee to finance the collection of fees (Financial Times, 23 September 2003).

Some officials say total poverty levels do not matter, since some of the wealth created by economic growth is trickling down into the village. Zhang Xiaohui, a ministry of agriculture researcher, tells how 'average per-capita rural expenditure on durable goods - such as refrigerators, television sets, air conditioners and mobile phones - rose by 33 percent last year to Rmb89' (Financial Times, 23 September 2003). But Rmb89 is just £5 - hardly a massive display of expanded prosperity. And this sum will not be evenly divided among the village families, but will be overwhelmingly in the hands of the official and better off farmers.

Casual work

This explains why, despite images of the middle class growing accustomed to western lifestyles and luxury goods, there are still between 100 million and 150 million peasants like those shown in the Chinese film Blind Shaft who pour into the cities each year seeking any sort of casual work they can get.

There they face competition in the scramble to get jobs from another 30 million urban unemployed. This number shows no sign of falling, as workforces in the old heavy industries are slashed so as to increase still further their capacity to create inputs for the new export industries. A good example of what is happening is PetroChina (still 90 percent state-owned). It has cut three quarters of its workforce, which once amounted to 1.6 million people. When they lose their jobs in heavy industry, people also lose the minimal welfare benefits (cheap housing, healthcare) - the so called 'iron rice bowl' - that used to go with them.

The great majority of the new jobs that are created as other industries grow only seem attractive in comparison to the acute poverty which is the fate of the urban unemployed and so many of the peasantry. So, for instance, the Pou Chen shoe company, which employs 110,000 people, pays its workers only 'about £59 a month, or 27p an hour for up to 69 hours a week and provides dormitories for migrant workers who must obey strict curfews' (Financial Times, 4 February 2003).

The rural poverty, the unemployment, the cutting of the workforce in the old industries and the low wages are not accidental features of the Chinese 'model', but central to it. The growth of output is based upon rates of accumulation even greater than during the heyday of the command economy. Estimates suggest that no less than 40 percent of national income is 'saved', ie diverted away from consumption to investment of some sort or other. That is not possible without keeping the living standards of much of the population to the minimum even as the number of dollar millionaires multiplies and sections of the middle class get access to western-style consumer goods for the first time. Accumulation of wealth means, as in the England of Marx's day, accumulation of poverty as well.

Apologists of the 'model' argue that this is a temporary phenomenon, that further economic expansion will pull peasants into the modern sector, and that wages in that sector will rise as total national output grows. Indeed, they foresee a time in which mass demand for consumer goods in China will enable other, still poor, parts of Asia to follow the same path to industrialisation. They assume that Chinese growth will continue smoothly into the future.

This is the third fault in their argument. There is nothing to guarantee that growth will continue smoothly in that way. In fact, there are elements built into the model and its articulation with the wider world system that make such a prospect fairly unlikely.

The model rests upon a level of accumulation that cannot easily be sustained, but which cannot be abandoned either. The dynamism of the 'new' industries is based upon frenetic competition to build up production facilities in competition with each other and with foreign firms.

For the moment this translates into the growth of Chinese exports and, domestically, a rapid expansion in the consumer goods available to the better off sections of the middle class. So car sales were 40 percent higher in October than a year before, furniture sales 40 percent higher, and home appliance and audio-video sales 21.5 percent higher.

But as in the classic capitalist boom, serious problems lurk just below the surface.

The first is a continual tendency towards overproduction. Rival firms are expanding their production facilities even as the pressure to keep wages and peasant incomes down in the interests of accumulation prevents the domestic market rising as rapidly. According to the National Statistic Bureau 'of all Chinese manufactured products, 90 percent are in oversupply'. Chinese government officials complain that 'investment in many sectors - including property, cement, steel, cars and aluminium - is being overdone' (Financial Times, 18 November 2003).

Slashing prices

Firms have reacted by trying to get rid of excess consumer goods output by slashing prices: 'Among Chinese companies, the price war is particularly intense because competitors often chase market share rather than trying to improve short-term profitability... The relentless competition among local suppliers keeps profit margins almost invisible for many companies...' (Financial Times, 4 February 2003).

Profitability from many exports cannot be much higher, since Chinese companies in foreign markets are no longer just competing with higher-priced goods from already industrialised countries like South Korea, but with cheap goods from other Chinese firms - witness the drop in the retail price in this country of cheaper, Chinese-manufactured, electrical goods.

The trend towards overproduction is accompanied by continued investment in capital-intensive rather than labour-intensive plant and machinery. 'Companies have often found it cheaper to spend money on mechanisation rather than to employ and train workers. This has resulted in a fall in the number of jobs created as a percentage of GDP growth in recent years, says Li Shuguang, of Beijing's Zhengfa University' (Financial Times, 23 October 2003).

In other words, the expansion of output to the limits of the market is accompanied by a rise in the ratio of investment to labour - what Marx called a 'rising organic composition of capital'. Together the two factors put a pressure on real industrial profits which is hidden by the willingness of banks to provide credit.

But this raises questions about the banks themselves. It is estimated that their 'non-performing loans' equal between 20 and 45 percent of GDP. The Financial Times comments that 'by either measure, China has the weakest banking system of any large economy'.

The government could - and probably would - intervene to stop any of the banks going bust. But the cost would eat enormously into government revenues.

Expanding overseas sales is the only way to relieve pressure on profitability. But this depends, at least in part, on the government keeping the price of Chinese goods low by stopping China's trade surplus leading to a rise in the dollar value of its currency, the Remninbi. Such a rise, as demanded by the US government, would put up the price of Chinese exports and make foreign imports more competitive with locally produced goods in China itself.

Hence the apparently absurd situation of the rulers of a country who are desperate to expand industry and industrialise lending large sums of money to the US banking system so as to keep the value of the dollar high and that of their own currency low. The ultimate absurdity is that some of this money is now flowing back into China to allow US-based multinationals to get control of parts of Chinese industry.

Far from China being on a stable path to growth, its rulers are involved in an elaborate balancing act - and one which is in part dependent upon another balancing act by the US administration as it attempts to prevent a collapse of the dollar by keeping Chinese and similar funds from elsewhere in East Asia flowing in, while trying to force the Chinese government to change the value of its currency so as to make life easier for US manufacturers.

The balancing act might just work. Dire prophecies about imminent economic crisis in China in the early 1990s and the late 1990s (for instance a claim in the Economist in October 1998 that 'China is about to catch the Japanese disease') were proved wrong. But no one in their right mind would bet on a favourable outcome for the indefinite future. The fact that capitalist booms do not always collapse into dire slumps does not mean that they never do.

There is a dynamism to capitalism even in a crisis-prone phase like the present. Competition can still mean the rise of some capitals, sometimes unexpectedly, and the equally unexpected decline of others. But the dynamism creates instability, not balanced expansion for the system as a whole, and this translates into sudden political and social crises.

Meanwhile the expansion of industry is enlarging the size of the social force, the working class, fear of which led the regime to clamp down so savagely on the student protests in Tiananman Square in 1989. And over the last couple of years a rash of strikes in both the old and the new industries has shown that that force is beginning to develop fighting traditions of its own in opposition to both the old state capitalists and their private capitalist progeny.