Instability and crisis in China

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Despite its meteoric growth rates, China may not be the economic juggernaut the Western media portrays. Jane Hardy uncovers the structural tensions and the workers' movements challenging the global superpower.

According to the International Monetary Fund the US has been knocked off top spot in the global economy and replaced by China. This further heightens the hype about China. But a recent book by Matthew Crabbe, Myth Busting China’s Numbers, is critical of some of the statistics. If you take spending power per head, for example, the picture is very different.

Nevertheless, meteoric growth rates in China over the past two decades are undeniable, as is the fact that it accounts for the vast proportion of global production of a number of goods. Rapid growth is evident in the pace of urban development and the futuristic-looking cities that have grown up in a short space of time. But accounts of China’s success as an economic juggernaut fail to take account of problems and instabilities that are emerging in the economy, and how its low wage model is being increasingly challenged by workers.

A key factor in China’s rapid growth has been unparalleled levels of investment. The proportion of national output going into investment is significantly higher than in other developing economies and over twice the average for the rich G7 countries. This colossal rate of investment was enabled by the exploitation of low-paid workers and by the high levels of savings of workers and peasants characteristic of all the rapidly industrialising Asian economies after 1945.

According to the World Bank, from 2000 to 2013 China’s annual growth of investment averaged 12.2 percent, while the growth of private consumption averaged only 7.3 percent. In other words, consumption has not grown quickly enough to absorb what is produced and the economy has had to rely on exporting goods. This caused problems in the wake of the economic crisis of 2008 as demand declined in the US and Europe. The mega-stimulus package introduced by the Chinese government in 2008, estimated to be $570 billion, made the problem of the imbalance between consumption and investment even worse.

Only 20 percent of the rescue package was directed towards social spending. The bulk of it went into more investment in sectors already plagued by over-capacity, such as steel and concrete, and the construction of the world’s fastest high speed rail system. The infrastructure boom and massive expansion of credit insulated the Chinese economy from the collapse of exports in the wake of the crisis, but laid the basis for China’s version of the sub-prime crisis.

Huge debts amassed by local governments and the rapid expansion of informal markets to supply credit threaten to boomerang back on the real economy. In response to the government urging more borrowing after the 2008 crisis, local governments accumulated unprecedented debts to undertake huge infrastructural projects. Similarly easy credit was made available to state-owned enterprises. Cheap loans to firms and local government have amplified over-investment into a generalised risk to the economy.

Another source of instability is the growth of an informal finance sector or “shadow banking”, as underground lenders give credit to people and companies who may not otherwise qualify. These loans are then “sliced and diced” into investment packages that resemble the “toxic” collateralised debt that triggered the first phase of the current global crisis. Credit Suisse has described the burgeoning of informal lending as a “time bomb” that poses a bigger risk to the Chinese economy than even the amassing of debts by local government. These are a sign of an economy facing very severe instability.

Even in 2007 premier Wen Jiabao told the People’s Congress that the economy was “unstable, unbalanced, uncoordinated and ultimately unsustainable”. Reflecting the fears of China’s ruling class that the scale of investment is not sustainable, the 12th Five Year Plan (2011-15) called for a sharp change in the pace and structure of economic growth, which included slower growth and a rebalancing from investment to consumption.

However, while recent years have seen some increase in wages, partly as a result of workers’ struggles, a big increase in wages presents immense difficulties for the ruling class. The share of exports as a proportion of output has fallen from a high of 39.1 percent in 2006 to 26.1 percent in 2013, but China’s growth model remains highly dependent on exports to the US and Europe.

Because productivity in China is so much lower than in the advanced capitalist countries and other East Asian economies, low wages are needed to maintain its international competitiveness. Some regions of China, such as Guangdong in the south east, are now viewed as uncompetitive. As Chinese capital has become ever more integrated with the global economy the question of competitiveness is an increasing problem for China’s rulers.

Geopolitical aspects of China’s rise have grown in significance with China’s increasing dependence on the global system. China’s overriding long-term goal is to increase its economic might, military clout and diplomatic influence. China and India have signed a series of agreements, including a “strategic and cooperative partnership for peace and prosperity” in 2005. Also China is closely allied with India’s fiercest rival Pakistan and supplies it with fighter aircraft, warships, helicopters, tanks, early warning systems and various types of missile.

China has increased military spending by about 15 percent a year over the past decade. Its shift into hi-tech weaponry and military technology is reflected in the development of advanced satellite communications and maritime surveillance systems, cyber-warfare capabilities, and advanced missiles. Military, especially naval, power projection dovetails with China’s growing global commercial interests and the dependence of 90 percent of its foreign trade on sea routes.

Energy imports are particularly vulnerable: China currently imports over half the oil it consumes and is likely to increase this, according to US estimates, to nearly three quarters by 2030. Rivalries between national ruling classes produce an inescapable logic of competitive war preparation and geo-political tension that both diminishes the resources available to satisfy pressing human needs and contains an ever-present danger of armed conflict. Thus China’s efforts to break free of encirclement by the US and its allies provoke fears of China’s rise and new attempts to contain China, which inevitably responds by renewed efforts to strengthen its geopolitical position. The entire region — from North and South Korea, through the East and South China Seas — is one of mounting tension and military posturing.

China’s policy of “Going Overseas” (Zouququ) can be traced back to 1999. Primarily this has been associated with accessing raw materials in Africa and Brazil to fuel its huge growth machine. This has been accompanied by soft diplomacy to exert influence in these areas through construction and engineering projects underpinned by significant financial and political resources. But more recently China is getting a foothold in Europe. In 2010 Chinese foreign direct investment in Europe was €6.1 billion and by 2012 this had increased fourfold to €27 billion.

The Balkans and Central and Eastern Europe (CEE) are being used as a “stepping stone” to the core capitalist economies of the EU. The ravages caused by the fallout of the 2007-2008 crisis, poor infrastructure, privatisation and cuts in public spending have opened up new opportunities in these countries. This growing presence of Chinese investment in CEE and the Balkans was formalised in a 2012 agreement in Beijing between China’s Ministry of Foreign Affairs with mainly post-communist countries in or on the fringes of Europe.

It includes a $10 billion special credit line and setting up an investment cooperation fund and the aspiration to increase trade. It is bolstered by a series of agreements between China and individual governments, such as the Sino-Serbian Partnership in 2009. In Hungary prime minister Orbán of the right wing Fidesz party emphasised the importance of the East and even said that although Hungary’s “ship is sailing in Western waters, the wind blows from the East”.

The prize is entry to the core economies of Western Europe, trying to get up the international value chain and getting access to the lucrative market for infrastructure. The terminus of MSR, in the Greek port of Piraeus, is now partially owned by China’s state-owned shipping giant COSCO and is now the main entry point for Chinese goods into Europe. Keeping imports competitive requires reduced shipping costs to offset rising costs in China. Chinese exports can sail through Suez directly to Greece and then be taken by train through CEE countries to the heart of Europe, reducing the transit time from roughly 30 to 20 days.

In November 2013 China, Serbia and Hungary signed a Memorandum of Understanding for the construction of the Hungaro-Serbian High-Speed Railway connecting Belgrade and Budapest to facilitate the transport of Chinese exports from Greek ports to European markets. Construction is set to begin in 2015 and will be financed by loans from China’s import-export bank and built by the state owned China Railway and Bridge Company. This shows new aspirations on the part of the Chinese state. However, while Chinese foreign investment in Europe has grown rapidly it still accounts for only a small proportion — we are not witnessing a Chinese takeover.

China’s rapid growth has brought millions of people out of the most extreme forms of poverty, but rampant corruption, increasing polarisation of wealth, land grab and conspicuous consumption by those that have enriched themselves have led to huge resentment and explosions of anger. There is also a massive divide between people who live in urban and rural areas, and between the coastal regions and the hinterland.

In 2010 there was a strike wave in transnational corporations in Southern China where workers managed to win large wage increases. In 2011 migrant workers were the source of social unrest. Huge riots expressed the cumulative anger of this group of super-exploited workers. Guangdong, the southern heartland of China, which accounts for roughly one-third of exports, was rocked by a large and violent protest. And there were battles in other places such as Zengcheng where there were three days of riots and running street battles. Around 10,000 people attacked police property and burned and overturned armoured vehicles, and 6,000 police were deployed to get the protest under control.

The huge growth of the economy over the past 30 years has been driven by rapid urbanisation and a seemingly endless supply of cheap migrant workers from the countryside to the cities. The OECD reports that by 2011 200 million people were drawn into urban areas through official and unofficial migration to work in the factories, construction sites and restaurants. One side-effect has been the creation of a massive group of people who lack access to basic social services and have few rights in the cities that they helped to build.
The pernicious hukou residency scheme segregates urban and rural workers, not just geographically, but in terms of their access to political rights and their entitlement to health, education, housing and social security. It means that migrant workers in the big cities without residency have the same status as illegal immigrants and are subject to the same abuses and exploitation.

A recent China Labour Bulletin looks at how workers’ protests between 2010 and 2013 were driven by downsizing, closure, relocation sale or merger. In part this is the result of China losing its low wage cost advantage, in some regions at least. As the wages of factory workers increased by around 50 percent from 2010 to 2013 low cost labour intensive businesses such as garments, shoes and toys looked for cheaper inland locations or moved to smaller cheaper developing countries such as Bangladesh and Cambodia.

From 2011 to 2013 the China Labour Bulletin recorded 1,171 strikes and protests across the country. Most were in the industrial heartland of Guandong, and the main demands were for compensation for unemployment, wage arrears and pay increases. But there were also strikes outside of the factories. In the same period there were 306 strikes and protests by transport workers, 69 teacher strikes and a series of strikes of sanitation workers in and around Guangzhou that forced local government to improve their pay and conditions. According to the China Labour Bulletin, “Workers are shaking off the image of poor, exploited individuals and emerging as an active, dynamic and unified group capable of taking action to help itself.”

As Larry Elliott and Angela Monaghan pointed out in the Guardian newspaper at the end of 2014, China is crucial to the performance of the global economy. A slowdown would affect exports to China. This would affect countries such as Germany, which sells it machine tools for industrial expansion, and those such as Australia which provide the raw materials to feed its growth machine. The prices of goods leaving China are falling and if this trend continues it could contribute to deflation in the Eurozone, with the dangers that that entails. Meanwhile a growing confidence of the Chinese working class and frequent explosions of anger continue to put pressure on China’s working class from within.

Jane Hardy will be speaking at the International Socialism journal day school: China, World Capitalism and Workers’ Resistance.