China: A bubble about to burst?

The growth of China is the most elemental proof that the world economy has escaped the stagnation, which gripped it during the 1970s/80s. But many remain in denial, they point to the alleged “over accumulation of capital”, to assert that China is about to explode...writes Bill Jefferies...dragged down by its over investment, the weaknesses in its banking sector and the under consumption of its working masses. A series of recent papers from the OECD, Goldman Sachs, the World Bank and Deutsche Bank have provided interesting evidence to counter this assertion.

Goldman Sachs Global Economics Paper No: 146 begins by addressing exactly this point:

“One of the most popular and widely-held arguments against investment in China goes as follows: 1) fixed asset investment (FAI) is growing at above 20% year on year (yoy), while the investment-to-GDP ratio in China is already above 45%, i.e., above the levels reached by Asian economies before the 1997 crisis; 2) this investment boom is financed by misallocated bank credits and generates few returns; and 3) therefore, there is an over-investment time-bomb in the Chinese economy, which will soon result in a sharp correction in investment and GDP growth, rising non-performing loans (NPLs), and deflation.” (GS No:146 p3)

We have already noted elsewhere how the failure to adequately differentiate between the output of the former planned economies and the newly created capitalist ones has meant that the scale of capitalist advance under globalization has been grossly underestimated by the traditional measures of GDP (Gross Domestic Product – the value of output in a given year). As we shall see this mismeasure continues to affect estimates of GDP themselves and of Fixed Asset Investment (FAI). The report continues:

“Although this is a popular view, we believe it is wrong for two reasons: 1) the conclusion is based on macro data that is deeply flawed, leading to a substantial overstatement of the investment-to-GDP ratio, and 2) a high investment-to-GDP ratio is consistent with China’s rapid growth. The fact that the return on capital in China is high and generally has been climbing over the past decade supports our thesis that the investment strength in China is sustainable.” (GS No:146 p3)

A persistent feature of discussion around China has been around the correct valuation of its economy or its GDP. If measured in GDP dollar terms China’s economy (not including Hong Kong) is assessed as being around $2.5 trillion, this follows a 17% one off increase in 2005 to account for an under valuation of services. When measured in GDP PPP (Parity Price Purchasing) which attempts to account for the lower dollar value of developing economies by adjusting for what wages can actually buy, the value of the economy is around three times that level.

There is good evidence however, based on the intensity of raw materials use in the economy, the proportion of services in economies of a similar size and the disparity between local and national reports of GDP growth (which are generally around 2-3% higher per annum when aggregated than national reports), that the Chinese government consistently underestimate the extent of GDP growth in order to fend off US pressure for the upward revaluation of the Yuan. Goldman Sachs comment:

“In our view, the so-called “over-investment” problem in China reflects more data quality problems, rather than a true underlying issue. The reported investment-to- GDP ratio, which looks alarming is significantly overstated because of the over-estimation of investment, under-estimation of consumption, and under-estimation of GDP.” (GS No:146 p3)

The report traces the growth of gross fixed capital formation as a proportion of GDP.

Gross Fixed Capital Formation % GDP

1990 25%

1995 34%

2000 36%

2005 42%

(GS No:146 p3)

And contrasts this growth with the reported rates of GDP growth.

“If investment has grown at 20%-30% yoy, and if the ratio of investment to GDP is around 45% (the officially reported share), real GDP growth from investment alone would be 9 to 13.5 percentage points (20% x 45% = 9% to 30% x 45% = 13.5%). That is, even without any growth in consumption and net exports, real GDP growth would have been 9%-13.5%.” (GS No:146 p5)

If these levels of fixed asset investment were accurate, they would account for China’s entire growth in GDP levels on their own but as:

“Both consumption and net exports have recorded positive growth in the last few years, and reportedly contributed at least 5-6 percentage points to real GDP growth.” (GS No:146 p5)

When combined they would produce GDP growth rates of between 14% and 20% annually, so either the rates of fixed capital investment are too high or:

“Alternatively, the reported investment-to-GDP ratio could be too high because real GDP growth has been estimated at only 10%!” (GS No:146 p5)

Either GDP is underestimated or fixed asset investment is overestimated. The report concludes it is probably a bit of both and examines the reason why:

“Because land purchases do not constitute incremental new capacity added to the capital stock, under-adjustment of this cost in investment spending leads to overstatement of capacity expansion.” (GS No:146 p6)

The growth of a market for land is very recent in China. The housing market was only established in 1999, the report asserts that part of the reason for the overestimation of investment may be because this fundamental change to the operation of a capitalist market has not been adequately accounted for. Investment in housing is regarded as fixed asset investment but before 1999 that investment was made by the state.

“…One important factor contributing to the investment-consumption dichotomy is the emergence of housing demand since the end of the 1990s. Private housing purchases are classified as investment spending in China, following the conventional international practice. However, housing spending started from a nil base in 1998-1999 but has since been growing at a much faster speed than GDP. Such a rapid structural change in what are household outlays has led to misperceptions of a declining consumption-to-GDP ratio and therefore weak consumer demand in recent years.” (GS No:146 p6)

After 1999 it was made by property speculators who sharply increased prices to put the burden of housing investment onto the working class, this was in effect a cut in workers wages and consumption as a proportion of GDP has fallen by 15% since 2000 as a result.

Consumption % GDP

1990 63%

1995 58%

2000 60%

2005 52%

(GS No:146 p16)

The scale of working class demand i.e. the nominal value of their wages may have increased but their value had declined as proportion of GDP because of the massively increased housing costs.

In contrast to Goldman Sachs however, there is no reason to believe that the fall in the proportion of consumption in GDP is a problem for Chinese capitalism. In fact the very opposite. As the World Bank (2006) have pointed out the fall in the value of the workers wage as a proportion of GDP has resulted in increased profits for Chinese capitalists:

“…the share of output going to workers declined from 24 percent in 1998 to 17 percent in 2005. In other words, enterprise profits increased its share of a very rapidly growing pie.”

World Bank A Note on Saving, Investment, and Profits of China's Enterprises 2006

Goldman Sachs want to prove too much, there is no reason why any given level of fixed investment equals an over-accumulation of capital it is not the proportion of investment per se that creates over-accumulation but the relation of investment to profitability, so although Goldman Sachs show that there may be problems with the deflator for fixed asset investment as:

“All official investment series are in nominal terms, and we believe an under-estimation of the FAI deflator has resulted in a significant overstatement of real investment spending.” (GS No:146 p6)

And that there continues to be an underestimation of the contribution of services to the economy, which is far lower than a typical capitalist economy of China’s size due to the origin of the GDP measures in the Net Material Product measures of the former planned economy.

“The underestimation of consumption due to inadequate statistical coverage of service consumption is probably much more severe than the overestimation of investment spending, resulting in an overall underestimation of the GDP level and growth. The latest upward revision of the GDP level in 2004 by almost 17% exemplifies the point starkly.” (GS No:146 p7)

What is far more fundamental is the direction of the rate of profit in the Chinese economy. If profit rates are rising then capital can not only receive the appropriate going rate from its investment but more capital will be created to meet the growing range of investment opportunities. If the rate of profit is rising, then there can be no over-accumulation of capital by definition and indeed Goldman Sachs note that:

“Return on capital is solid, on an uptrend, and substantially exceeds the official lending rates.” (GS No:146 p12)

It there was an over-accumulation of capital, then rates of return would be falling. One indication of this rise in profits rates is the proportion of profit to GDP. Goldman Sachs use a measure of operating surplus + depreciation as a proportion of GDP to establish their version of a rate of profit.

This is not a perfect measure of the rate of profit, as it includes profits and depreciation on both sides of the equation (i.e. profit+depreciation/(GDP)) when GDP includes constant capital and therefore depreciation, variable capital and profit. Strictly speaking the rate of profit, is profit/capital (s/c+v).

Nonetheless the Goldman Sachs measure provides a guide to the direction of profit rates, even if it understates it. Assuming that depreciation is a constant proportion of fixed asset investment say 6%, changes in depreciation will not explain the larger part of the increase in the proportion of operating surplus + depreciation, therefore a growth in profit+depreciation/GDP must indicate an increase in the rate of profit.

Operating Surplus + depreciation proportion of GDP

1993 35%

1995 34%

2000 35%

2005 39%

(GS No:146 p16)

And the trend is clear - not only has the value of GDP quadrupled over the period from 1993-2005 but the proportion of profits as a part of GDP have increased as well, so that the mass of profit has increased exponentially and the rate of profit has increased even faster.

It is this surge in profits, both in mass and rate, which both explains and funds the present explosion in fixed asset investment in the Chinese economy. The increases in productivity associated with the rising investment means that it more than offsets the tendency for the organic composition of capital (the proportions between constant and variable capital) to rise, to the point that at present increases in investment by generalizing the revolution in productive technique across the economy as a whole has lead to a fall in the organic composition of capital and hence an increase in the both the mass and rate of profit.

The very fact that Chinese investment is rising so strongly is clear evidence that profit rates must be increasing as well, otherwise why would capitalists invest? If high rates of fixed asset investment lead to falling profits, then far from seeing an explosion in investment you would see a decline as during the stagnant 1980s but rather:

“Data on corporate earnings, on the other hand, suggests a very different picture of the health of investment and thereby the overall Chinese economy: 1) the investment is financed more by retained earnings; and 2) the return on investment in China has been high and rising since the turn of the century, suggesting that China can invest more before its investment return gets lower. In our view, improved corporate profitability and rising profit share in national income are mainly reflections of the successful state-owned enterprise (SOE) restructuring in 1997-1999, and the accelerated integration of China’s abundant labor in the global economy.” (GS No:146 p3)

This restructuring of industry away from the State Owned Enterprises (SOEs), has enabled massive productivity gains in China’s industrial core. These productivity gains have increased both relative and absolute surplus value very sharply.

“The share of SOEs in total industrial output is now around 20% compared with above 80% in 1978.” (GS 147 p21)

This process of rationalization and privatization has been combined with the development of a higher technological mix of exports. China may once have exported mostly low cost cheap goods but it has steadily maintained and improved the quality of its manufacturing output, through improving efficiency but as importantly through creating a massive programme of domestic research and development.

According to the OECD (Dec 2006), in December 2006 China surpassed Japan for the first time in PPP research and development expenditure, to become the second highest investor in R&D in the world. On present trends China will overtake the combined EU by 2010 and the USA by 2013. This has meant that the value of Chinese goods has increased as well their quantity. This is measured by the Total Factor Productivity (TPF), Goldman Sachs use a measure of TPF, to assess the increase in the rate of return across the entire investment:

“In a recent global paper, we showed that a sharp and sustained increase in productivity was the main driving force behind China’s fast growth during the post 1978 period. Using the revised GDP data, we find total factor productivity (TFP) gains averaged 3.5% per annum during 1978-2004, and accounted for 38% of China’s growth, more than the contribution by capital accumulation.” (GS No:146 p20)

Increases in TFP point to rising rates of profit as they mean that the output of Chinese factories is being priced as more intensive, higher quality labour on the world market. Capitalism is a system of the exchange of equivalents, goods are generally sold at their value, consequently, constant capital - machines, raw materials, land etc. can only add the amount of value they cost to the value of the commodity produced. If a new investment of capital means that the capitalist is able to gain a higher value for their product than the value of this investment, this higher value must be a redistribution of surplus value from other less efficient capitalists.

“The exceptionally productive labour operates as intensified labour; it creates in equal periods of time greater values than average social labour of the same kind... Hence, the capitalist who applies the improved method of production, appropriates to surplus-labour a greater portion of the working-day, than the other capitalists in the same trade.”

Source: Marx Capital Vol I Relative Surplus value Ch 12

If TFP is rising it means that China is reclaiming an ever increasing proportion of the super profits drained from the national economy by foreign investors. Goldman Sachs estimate that gains accruing from TFP account for a very significant proportion of the total increase in Chinese GDP.

“Using the revised GDP data, we find total factor productivity (TFP) gains averaged 3.5% per annum during 1978-2004, and accounted for 38% of China’s growth, more than the contribution by capital accumulation.”

(GS 146 p20)

Both the quantity and quality of Chinese output is growing. China is producing more of more valuable commodities.

But Goldman Sach's estimate of China's very rapidly growing TFP is almost certainly a gross underestimate as it fails to account for the difference between the centrally planned economy of the Stalinist state, which did not produce profits, capital or value and the capitalist economy of China since the mid 1990s. The estimated value of China’s initial capital stock profoundly effects the measure of TFP:

“Initial capital stock estimates have an impact on the estimated TFP, although its impact tends to diminish over time. Holding other variables constant, the value of initial capital stock is inversely related to the growth rate of total capital stock.” (GS 133 p22)

The higher the initial capital stock the lower the growth of total factor productivity, the lower the initial capital stock the higher the growth of total factor productivity.

Goldman Sachs establish their base year estimate of the initial capital stock based on the work of Chow (1993 & 2002):

“Chow’s estimate (1993 & 2002) of initial capital stock for China in 1952 is the most widely used. According to Chow, K0 (or K1952) equals CNY220 bn (1978 price), 72 bn of which was land capital. This number grew to CNY1,141 bn (1978 price) in 1978, the starting year of our analysis.

Lin and others (2003) take Chow’s capital stock number at 1952, but deflate the annual new investment by the implicit fixed asset investment (FAI) deflator compiled by Hsueh & Li (1995), and raise the depreciation rate to 6% per annum for the Great Leap Forward and Cultural Revolution periods. As a result of these adjustments, they arrive at a smaller capital stock value of CNY1007 bn (1978 price) for 1978.

In this study, we used Chows estimate for Chinas initial capital stock at 1978 for our baseline estimation of TFP growth. But we also compared our results with those derived using Lins lower estimated initial stock.”

(Where K = the initial capital stock)

(GS 133 p22)

Except of course China was not capitalist in 1978. Chows estimate of China’s initial capital stock confuses the fixed assets of a planned economy with capital.

According to the OECD (2005) in 1978 0% producer goods and 3% consumer goods in the Chinese economy were sold at market prices, by 1985 13% producer goods and 34% consumer goods, 1991 45% producer goods, 34% consumer goods, 1995 78% producer goods, 89% consumer goods.

This estimate of the initial capital stock therefore grossly overestimates the value of the initial capital stock, as in 1978 only a tiny fraction of output was produced according to the law of value. In effect there was no capital stock in 1978. There were machines. There were roads and cities. But there was no capitalism. None of this fixed capital contributed towards the production of profits or surplus value because in 1978 China was a planned economy it was not capitalist, it had no capital. Therefore this fixed capital was not fixed capital in 1978 but rather means of production, capital is a social relationship whereby a capitalist invests money – to buy labour and machines or commodities – to produce more money, m-c-m’, these machines only became capital through the process of the restoration of capitalism over the next two decades.

While the process of market reforms through the 1980s had begun to erode the hold of the planned economy, the dominance of the law of value was only established across the economy as late as 1995.

This means that this entire capital stock cost the capitalists effectively nothing.

Just as there was no housing market before 1999, there no market at all in 1978 and by 1991 it was still not dominant, with the restoration of capitalism, the fixed capital that had been stolen for free by the new state capitalist apparatus, begun to operate as capital, extracting surplus value from the working class to be reinvested profitably, but this fixed capital cost nothing.

As capitalism has developed the value of these assets i.e. the cost of their replacement at market rates, has grown exponentially, providing the capitalists with an ongoing subsidy a huge source of profits to be reinvested in the domestic economy but this means that critically, the prevailing estimates of TFP growth are gross underestimates, because of the inverse relationship between the capital stock and the growth of TFP. The lower the initial capital stock, the higher the growth rate of TFP and visa-versa, if the initial capital stock was nil, then the growth of TFP, the amount of value accruing to the capitalist across the total investment have grown much faster than the Goldman Sachs estimates. It means in effect that the restoration of capitalism was worth at least a trillion dollars to Chinese capitalism at 1978 rates but if we posit that the growth of the notional capital stock rose in line with that of average GDP 9.7% between 1978-1991, this figure rises to around $3 trillion by 1991.

By measuring the value of the output of the planned economy as if it were a capitalist one, Goldman Sachs grossly underestimate the rise of Chinese capitalism’s rate of profit, which was 0% in 1978 because there was no Chinese capitalism.

These productivity gains have meant that the efficiency of the exploitation of the Chinese working class has massively increased, raising the intensity of the exploitation of labour alongside a huge growth in the size of the working class and urban population, raising the amount of labour that can be exploited at the newly increased rate.

While SOEs still dominate in many sectors, including utilities and raw materials production, this revolutionizing of the productive base of Chinese capitalism has lead to a very rapid growth in the rate of profit.

The share of national income compensation going to the working class and peasantry has fallen by 3%, in a period when the urban population has increased by 190 million.

Share of National Income Compensation labourer

1993 50%

1995 51%

2000 51%

2005 47%

(GS No:146 p16)

This does not mean they have become poorer;

“How can profit growth in industry have kept up with rapid increases in raw material prices in recent years? The answer is continued rapid productivity growth. As Mr. Shan also notes, labor productivity in industry grew at almost 20 percent on average since 1998, much faster than wages, which grew on average by about 14 percent.”

World Bank A Note on Saving, Investment, and Profits of China's Enterprises 2006

While the proportion of income going to the working class and peasantry has fallen, the total size of national income has increased massively and productivity increases have meant that the value of the goods going to make up an average wage have fallen very sharply as a result industrial wages have increased by 14% per annum for nearly the last decade, almost trebling. This explains why profits have continued to rise - the fall in wage rates is paid for by rising productivity so that increase in wage rates are more than matched by increases in profit rates, which provide the source of capital to fund the growth in fixed asset investment.

The growth of fixed asset investment very closely follows the expansion of urbanization, which has increased from 1990 23% of the population to 2005 40% of the population, while the total size of the population has increased.

“…the sector breakdown of China’s FAI in recent years, which suggests that most of the investment has gone to the non-tradable sectors. Such investment is being undertaken less to increase the supply capacity of China as a manufacturing powerhouse, but more to facilitate urbanization and further increases in consumption by the Chinese as they grow richer and more affluent.” (GS No:146 p9)

Investment in roads, housing, sewerage, airports, electricity plants, hydro and nuclear schemes, schools and shopping malls, are all necessary to maintain the rate of urbanization as China makes the transition from a rural to a urban society but they only provide the pre-conditions for manufacturing production, rather than the production itself.

“Urbanisation in China has picked up pace since the mid-1990s as enforcement of restrictions on migration became more relaxed. In the past five years alone, the urban population cumulatively has risen by some 100 million, putting the urbanisation rate just above 40%.” (GS 147 p5)

The increase in fixed asset investment grows alongside the growth of urbanization and is in large part a product of it and therefore it only has a tangential rather than an absolute relationship to the growth of manufacturing output. Nonetheless this investment has meant that a host of inventions which could not be generally applied across the world economy in the period of stagnation during the 1970s/80s, most notably the IT revolution, have revolutionized the productive base of world capitalism.

This revolutionizing of the means of production has lead to a sustained deflation of manufactured production as the average time required to produce each community has collapsed, to such an extent that prices of non-petroleum imported goods in 2006 are lower than in 1995.

Inflation

China Non petroleum import prices 2000 = 100

1990 96

1995 104

2000 98

2006 102

(GS 147 p3)

Far from showing the weakness of capitalism this shows its strength as the deflation is not arising from a collapse in production and demand but is takes place in the context of its rapid expansion.

The deflation of manufactured commodities has allowed the capitalists to reduce both the cost of constant capital through cheaper and more efficient machines and raw materials and hold down wage costs, as wage rises have been paid for out of rises in productivity.

From the turn of the new millennium the recovery of the transition economies has meant that raw materials prices have rebounded but even so the productivity revolution has been so marked that in spite of this manufacturing commodities have still not increased in price.

Nonetheless it does appear that the limits of this advance may now be being approached, as for the first time since the mid 1990s, Chinese unit labour costs, the cost of labour per unit of output have begun to increase.

China

Year	Unit Labour Costs % yoy	Export prices % yoy
1993	3	-6
1995	9	11
2000	-2	-4
2006	4	4

(GS 147 p8)

The close link between movements in Chinese unit labour costs and export prices is a really significant factor in the world economy not only could it erode the profitability of Chinese enterprises but it will also provide the material reason for the Chinese government to allow the appreciation of the Yuan against the dollar in an attempt to reduce the price of China’s imported raw materials.

This appreciation will have the side effect of transforming China’s material power into into financial power, as a rise in the Yuan will provide both the incentive and the means to rapidly increase their exports of foreign capital, it will create the final condition for China to complete its transition into an imperialist power but not through the exploitation of a monopoly on raw materials but as the re-incarnation of the Victorian England’s workshop of the world.

This points to a key difference between the restoration process of Russia and China. In Russia, the new bourgeoisie terrified of the prospect of capitalist restoration undertook a big bang privatization of the core of state assets in the 1990s, selling Russia’s wealth at knock down prices to a bunch of gangster capitalists who became the oligarchs. Rather than invest their wealth in the development of Russia, these super rich billionaires bought football clubs, yachts and houses in Belgravia. Only belatedly is the Russian state under Putin, attempting to renationalize a proportion of these assets to fund national development. In contrast the Chinese retained the ownership of the top 1000 firms in the hands of the state and these firms still account for around 40% of GDP, which when combined with the ownership of the banks;

“The four big state-owned commercial banks, namely Agricultural Bank of China (ABC), Bank of China (BOC), China’s Construction Bank (CCB), and Industrial and Commercial Bank of China (ICBC), together accounted for 52.5% of the banking sector’s assets in H1 2006.”

(Deutsche Bank Research Dec 06 p3)

Has enabled China to invest the sharply rising profits arising from the productivity revolution in its manufacturing industries in national development. Hence the surging infrastructural growth of the Chinese state:

“Corporate China is modestly levered and investment is funded mostly through retained earnings. An often-heard criticism against China’s investment “boom” is that it is funded by credit expansion and poses systemic risks to the banking system. However, bank financing only provides about 20%-25% of the funding source for China’s FAI, and its share has been declining. The bulk of the investment spending has actually been funded through retained earnings.” (GS No:146 p14)

This surge of profits is so strong that not only has it funded the investment boom but has enabled the recapitalization of the main banks themselves:

“As a result of capital injection, the capital adequacy ratio (CAR) of these banks has improved. At end-2005, the CAR of the BOC stood at 10.42% (2002: 8.15%), CCB’s at 13.57% (2002: 6.91%), and ICBC’s at 10.26% (2002: 5.54%)4. Improvements in the capital adequacy ratio have allowed these three banks to write down their non-performing loans (NPL) faster. The NPL ratio of the big 4 fell from 19.2% in Q1 2004 to 9.5% in Q1 2006.”

(Deutsche Bank Dec 06 p4)

The banks are not the fragile institutions of popular portrayal. They are massive state institutions with ample capital to ensure there financial strength. They have been very largely recapitalised over the last three years and this recapitalisation has been combined with continued increases in profitability of Chinese corporations:

“Corporate profit growth has consistently surprised on the upside. Despite persistent warnings or predictions of a collapse in corporate earnings by many analysts in the last few years, corporate China has actually delivered quite decent profit growth. Since mid-2002, the beginning of the current cycle, profit growth each year has stayed in the 20%-40% range, exceeding market consensus by a significant margin.” (GS No:146 p10)

As Chinese capitalism raises the quality of its output, producing more expensive higher technology goods, its output commands higher prices and China rather than foreign capitalists begins to reap a proportion of the super-profits being created by Chinese industry. In 2006 according to Deutsche Bank, there were 20 Chinese firms in the Fortune 500, an increase from 15 in 2005, this compares with 40 French and 40 British firms. China is presently in the final stages of the transition to becoming an imperialist power in its own right. The concentration of finance and industry through the state, a key legacy of the creation of Chinese capitalism from the planned economy of Stalinism, means that the Chinese bourgeoisie can concentrate the savings of the working class and super profits of sections of Chinese industry on a development plan in the interests of Chinese capital as a whole.

“The central government has welcomed greater foreign ownership in banks, but it is not yet willing to surrender majority control of key banks. The ceiling of foreign ownership was lifted in January 2004 to 25% from 20%. The ceiling for single foreign ownership was also lifted to 20% from 15%.”

(Deutsche Bank Dec 06 p4)

China retains almost complete control over its banking system, the key mechanism for semi-colonial domination in the imperialist epoch. Foreign firms produce around 59% of exports but probably 20% of these are Chinese firms disguised as foreign firms to take advantage of tax breaks. The proportion of Chinese capital formation undertaken by foreign firms is around 14% (UNCTAD 2005) lower than that of the UK. China is not a state dominated by imperialism. The kernel of Chinese monopoly finance capital already exists so that although the export of commodities continues to dominate over the export of finance capital, the imperatives of national development mean that China is becoming an increasingly important rival to the established Great Powers in Central Asia, Africa and Latin America.

How long before it becomes a fully fledged imperialism in its own right is a matter of interesting conjecture, but it will be years rather than decades:

“…the emergence of China has had a greater impact on the world economy than the industrialisation of Japan after World War II and the Asian Tigers after the 1960s. Japan’s role in the world grew dramatically from the 1950s its share of global exports more than doubled to around 8.5%. This is impressive. But in just the last 10 years, China has almost fully matched the entire increase in exports that we saw over 30 years in Japan!”

Goldman Sachs Global Economics Paper No: 147 (p5)

Lenin noted how the first boom phase of imperialism from 1900 until 1913 was marked by the creation of new imperialist powers such as Japan, which posed new threats to the established Great Powers, the parallels with China today are obvious.

Since our tendency first posited the idea of a new upward long wave in capitalist development, over two years ago there has been a mountain of further empirical evidence to support our analysis and China has surpassed Italy, France and the UK to become the fourth largest economy by dollar GDP in the world and by the end of next year it will overtake Germany;

“The share of exports in China’s GDP rose from less than 10% in the mid-1980s to 34% in 2005. Some 15 percentage points in exports share of GDP took place in the last five years, coinciding with Chinas accession to WTO and the huge rise in FDI inflows. China’s exports have risen threefold since 2000 to $762 billion. By 2004, China had displaced Japan an economy twice as large at current market exchange rate as the third-largest trading nation in the world, after Germany and the US.” (GS 147 p6)

In the next years perhaps as soon as 2010, China will complete the transformation into a fully fledged imperialism, if indeed it has not already done so.

Conclusion

The restoration of capitalism in China and the former workers states has meant that the world rate of profit has recovered to its highest level since the late 1960s, growing for two successive decades for the first time in a century, GDP per capita is growing at its fastest rate in forty years and the expansion of trade has recovered to its levels of the long boom.

Owing to mismeasures of GDP, FAI and TFP which arise through the transition of these former non-capitalist planned economies into capitalist ones, there has been a systematic underestimation of the impact of both the contribution of these former planned economies to the growth of the world market and to the growth of profitability within them.

This means that the current surge of fixed asset investment in the Chinese economy is funded by a surge in profitability which far from signalling the over-accumulation of capital has had powerful deflationary effects on the world economy, to the extent that it has lowered the organic composition of capital world wide, reducing the average price of constant and variable capital world wide and so raising the world rate of profit.

But it does appear with the recent increase in Chinese unit labour costs, that the limits of this qualitative advance may now be emerging.

That is not to say that the present upswing in the global economy is about to abruptly end, China’s productivity is still far better than that of its rivals and the expansion of China’s exports throughout the world continues to drive out relatively more inefficient production, meaning efficiency gains can continue to be made from generalizing the more productive Chinese output across the world economy but it does point to the limits of the potential of the current technological base of manufacturing.

When that revolutionizing potential is no longer able to offset the rising mass of constant capital necessary to develop the productive base, the organic composition of capital will be begin to rise and at that point the rate of profit will begin to fall.

If recent history is a guide we would anticipate that the present period of very strong growth will not last beyond 2010 before slowing, sharply for around two years. We would anticipate however, that if the present restoration of profit rates continues that when that slow down arrives, there will not be a major recession but just a pause before a further strong growth phase. How long that upward phase will last depends on the continued ability of the capitalists to quantitatively extend the qualitative advances in manufacturing processes created by globalization. But experience of former upward long waves, implies that that ability will be exhausted during the middle of the third business cycle, i.e. around 2015.

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Sources:

Goldman Sachs Global Economics Paper No: 146

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Goldman Sachs Global Economics Paper No: 147

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Goldman Sachs Global Economics Paper No: 133

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Deutsche Bank

China's banking sector: Ripe for the next stage?

Click here

OECD

FAST-FALLING BARRIERS AND GROWING CONCENTRATION: THE EMERGENCE OF A PRIVATE ECONOMY IN CHINA

Click here

World Bank: A Note on Saving, Investment, and Profits of China's Enterprises

By Bert Hofman and Louis Kuijs

click here

Fri 15, December 2006 @ 17:26