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Thursday, August 27, 2015

Will China Save the Global Economy?

Understanding the People’s Republic of China (PRC) constitutes a formidable challenge to every Marxist. Of course it's not a challenge based on some racist notion of “oriental inscrutability” or even the task of unraveling the obstacles presented by size, diversity, and complexity. Instead, it is the perplexing doctrine of “socialism with Chinese characteristics” that confounds many of us. While no one can contest that the Chinese Communist Party is the leading force in Chinese society, some see the Party as leading the PRC in the wrong direction-- along the path of capitalist restoration.
That capitalist relations of production exist and and have grown in the PRC is unquestionable. Both domestic private corporations and multinational capitalist enterprises have gained far more than a toe-hold in the national economy. Nonetheless, it is pointless to engage in the popular parlor game on the left of declaiming the PRC as socialist or capitalist. The more pertinent and useful question is: “Where is the PRC headed?”
I raised that question in an essay-- The Chinese Puzzle-- in December of 2011. Despite many reservations about the deceptively dubbed “reforms” accepted by the Chinese leadership, my judgment was that the socialist underpinnings of the economy, while dangerously weakened, were still intact: the state sector, relative to national annual product, was still five times greater than a typical European social democracy like France; the financial sector was predominantly state owned; and the planning mechanism was weak, but functional.
At the same time, I was fully cognizant of the many problems wrought by capitalist “reforms”:
The entry of capitalist features into the PRC economy has plagued it with the maladies that arise from the anarchy of markets: imbalances, speculative fervor and bubbles, inflation, labor unrest, grey and black markets, and labor market chaos. In the spring and summer of 2010, workers rose against low wages and working conditions in many areas. Again, this year [2011], there were significant actions for better pay, working conditions and against layoffs. In the fall, the PRC’s sovereign wealth fund was forced to buy shares in major Chinese banks. Despite the fact that private investors own a quarter or less of the country’s biggest banks, a sell-off by foreign investors caused a near panic met by the sovereign wealth funds’ intervention. Today, inflation, a construction bubble, and over reliance on exports weigh on the economy. (my emphasis)
But the PRC's economic stability during the worse years of the global economic crisis demonstrated, in my estimation, the existence and value of the remaining socialist base.
I concluded on a note of caution:
The country’s participation in global markets could present problems that even its remaining socialist tools cannot overcome. Moreover, it is not clear if the PRC will strengthen these safeguards or jettison them, as its leading Communist Party shapes this awkward mix of socialism and capitalism.
A Right Turn
Four months later, alarms sounded with the publication of a joint World Bank and the PRC State Council's Development Research Center report that urged an acceleration of privatization, deregulation, financial market liberalization, and openness to foreign corporate penetration. Of course this prescription is the conventional wisdom promoted by the World Bank. But most alarming was the endorsement of this agenda by such a prominent PRC body. The report urges:
In the financial sector, it would require commercializing the banking system, gradually allowing interest rates to be set by market forces, deepening the capital market, and developing the legal and supervisory infrastructure to ensure financial stability and build the credible foundations for the internationalization of China’s financial sector.
The study, China 2030, clearly represented the manifesto of the rightist “capitalist roaders” in the PRC leadership. As I noted at the time (The Battle for China's Future, 3-06-12), “...the leadership [walks] the thin, risky line between emerging capitalism and the remaining socialist institutions. But, clearly, The World Bank and its Chinese allies are determined to influence that direction. And there should be no doubt which direction China 2030 is intended to push those leaders.”
With the subsequent ascendency of the Xi Jinping leadership group, it became clear that further “reforms”-- economic liberalization-- were forthcoming. Xi sought to unleash market forces, diminish the power and size of the public sector, and court, in various ways, foreign capital and corporations. Keen to minimize the rampant corruption that accompanied the expansion of the private sector, the government also mounted an aggressive campaign to investigate and prosecute the most flagrant abusers. They hoped that this would dampen public resentment of economic inequities that invariably comes with the expansion of private profiteering.
Clearly, PRC's new generation of leaders have accepted the market dogma that further growth was threatened by regulation, a prominent public sector, and financial restraint. Clearly, they have been persuaded by liberal ideologues that more capitalism and less socialism is the order of the day.
And clearly, they have not foreseen the dangers lurking on that path.
The decision to go forward with liberalization was felt dramatically in PRC equity markets. PRC leaders urged investors to enrich themselves. Beginning in November of 2014, regulations against leveraging-- margin buying-- were relaxed, interest rates were cut, and international access to stock markets was expanded, resulting in the rapid advance of an already hot market. Initial public offerings (IPOs) multiplied; market capitalization increased five times in one year; margin loans doubled in six months, reaching 2.27 trillion yuan; individual investors surpassed 75 million, with even 31% of college students playing the market. The PRC leaders had unleashed a stock-market frenzy, resulting in Chinese combined equity markets, at their peak, becoming the largest in the world after the New York Stock Exchange.
The stock market “miracle” drove the benchmark Shanghai Composite index to a new high in mid-June of this year, reaching 5166 from 3334 at the end of last year.
But then the market collapsed. Less than a month later, $3.5 trillion in nominal value disappeared, with the market dropping to 3507. By late August it had further eroded to 3210.
Government measures to stem the crash were ineffectual. Despite suspending IPOs, suspending trading on many stocks, restraining margin buying, and allocating $19 billion to a market stabilization fund, the market continued to falter. Twenty-four million investors left the market, presumably after suffering large losses. To put a perspective on the losses, they were over 14 times the GDP of Greece.
Unlike in the past, the PRC had no socialist tools in their tool box (or they chose not to use them). Unlike in 2008 when the PRC leaders swiftly injected public funds into public enterprises and public projects to propel the economy away from the private folly of the global economy, the PRC leaders were overwhelmed by market forces that they were so eager to unleash.
In their enthusiasm to embrace markets, the leadership had pledged in February to allow the yuan's exchange rate against other currencies to float and remove controls on capital flows. Despite four quarters of capital outflows, the government freed the yuan exchange rate on August 11, unleashing a devaluation that promises to accelerate capital outflows. In the face of a collapse of the PRC equity markets, the leadership chose to answer with further market “reforms.” Moreover, Western commentators (see Paul Krugman, for example) bizarrely blame the rout on too few market reforms rather than the aggressive liberalization that overheated equity markets, an endorsement of a demonstrably failed policy. Capitalist bromides brought the PRC economy to this juncture. Will the PRC leaders continue to embrace them?
Global Turbulence
The current chaos in world-wide equity markets has made the PRC a convenient whipping boy. The commentariat sees economic problems in the world's second largest economy as dragging the global economy down. While China's economy is moving in the wrong direction and, consequently, contributing to the enduring capitalist crisis, it is far from the efficient or final cause of the painful throes of the capitalist system. Long developing, deeply embedded processes are working to undermine the capitalist system (see my The US Economy: A Midyear Report Card, 6-12-15).
But it is important to stress, nonetheless, that the Chinese economy-- even with its remaining socialist features-- is no longer able to rescue the global capitalist economy as it did, in part, in 2008. As Lingling Wei and Mark Magnier wrote in The Wall Street Journal (China to Flood Economy with Cash, 8-24-15):
Beijing’s struggles this summer have spooked many investors into viewing China as a threat to,
 rather than a rescuer of, global growth. During the financial crisis of 2008 and early 2009, China, with a colossal stimulus plan, acted as a shock absorber. Lately, it is China that is providing the shocks.
This is a stark and candid admission of the abandonment to the market of important, critical elements of the socialist economy by PRC leaders. One can only hope that they will come to their senses before they join others in trying to manage the unmanageable.

Zoltan Zigedy

1 comment:

John Marienthal said...

Some comments on ZZ's china blog.

1. Crap-shoot the stock market
Most people in Shanghai know the 1000 odd stocks(2010) that are traded on the shanghai stock market are rigged. You are making blind investments on the price going up and down, hoping you can get out before the price gets too low. There are no real market reports based on prior sales, future plans and forecasts, basic economic data is unavailable to the general public. For some state run companies basic economic data is considered a low level state secret. Even if there are accounting procedures no one trusts the Chinese accounting firms to be accurate. Simple tools like Price//Earnings ratio, is unavailable or unreliable.
So why do people gamble in the market? The answer is that the market is seen as one of the only ways you can make money. People are intent on buying a house for their family, either as newly- weds or as an investment. Real estate prices have risen 600 to 800 percent in Shanghai since 2001. Flats that were 4000 rmb are now 28000 rmb per square meter ( about 10 square feet.) A 2 bedroom flat will sell for 2,800,000 rmb. That flat is bare-wall there are no doors, no toilets, kitchen sinks, closets, no electrical outlets, or flooring. You must get a contractor to build all that for you -- after all you are going to live there for the rest of your lives so you want your choice of fixtures. It also means that if you have more than one place you have to spend thousands to fix it up to rent. What makes China different from our housing market, is that people will buy cash outright or get a short five or ten year loan from the bank.
The English language paper Shanghai Daily claims the average shanghai wage is 7000 rmb per month. Two people working, living with the in-laws , might be able to save 140,000 a year, It would take 20 years to pay for a house. Put 20% down, buy a house hope to sell it in two or three years at a higher price, OR borrow money to buy stock whose price has risen 60% in fifteen months. You know the stock price has gone up and has fallen, you just hope to be the lucky ones who get advance warnings when to get out. Locals in the know are plentiful, teachers I have worked with, other people tell you just before the market tumbles.
I THINK the central government encouraged the market as a mechanism of relief, to offer hope for people who could not have dared to hope to buy a house at today's inflated prices. No matter what the government, in the last five years, has done to rein in the rise in housing prices, Chinese realtors have circumvented. Even efforts to create a property tax have been quashed. Cities get a one time transaction tax on real estate, and small cities are loathe to lose that income.

2. Currency
The Chinese have controlled their currency. Years ago the dollar//rmb ratio was 1//8.28 recently it went from 6.18 to 6.3, the western press is exaggerating the impact of the change. In 1998 when currency speculators crashed the THAI market, China paid attention. The Rmb is still not convertible as a world currency, you can not speculate in Rmb currency debt swaps (these are the 2015 equivalent to collateralized debt obligations). The Chinese are moving to create an Rmb that would serve a closed market system for China and its nearby neighbors, that would be independent of the IMF or ADB.
3. Market forces
The CCP is keenly aware of the influence of market forces. The machinations of Beijing, Shanghai, and Shenzhen markets are only a small part of the Chinese economy. Even the fall of direct foreign investment in China has limited consequence because China has captured most foreign investment. Having the resources of the state, the ability to issue bonds, create credit, cast aside or create regulations in the absence of laws, the CCP can do anything it wants to preserve its power as the ruling party. It controls the state economy and more than that it controls the power grid. Don't play ball, you have a power brown-out.