Chinese capitalism and the left

China’s phenomenal economic growth of the last two decades continues to confound various leftist commentators reminiscing on the stagnation of the 1970s/80s. The Maoists of the US journal Monthly Review summed up this view in their April 2008 issue:

“As the US housing bubble bursts and the dollar’s dominance over the global financial system becomes increasingly precarious, the US economy is now going into recession and the global capitalist economy is entering into a new period of instability and stagnation.”1

While conceding the rise of China, they assert that its growth is dependent on US current account deficits. They claim that, due to rising inequality and the poverty of Chinese workers, its domestic economy is too small to play a significant part in the world market and that the predominance of exports within it means it is uniquely vulnerable to a US slowdown.

They are not alone. In one form or another Monthly Review’s under-consumptionist2 analysis of the US/China axis is repeated across the left. To quote Chris Harman in the ISJ:

“So the US economy holds the Chinese economy up by buying its excess production as imports, and the Chinese economy holds the US economy up by providing its firms and consumers with the cash to maintain their present level of consumption.”3

Since the credit crunch of last year – and especially since the first signs of recession in the US early this year – leftist commentators have been waiting for signs that China’s growth is being knocked off course, bringing global recession in its wake. They are likely to have longer to wait as, far from being another bubble about to burst, China has massive reserves which serve to insulate it and the world from the US’s credit crunch and associated crisis.

Between 1978 and 2007 official mainland China GDP grew at an annual average of 9.7% – a world record.4 In the last five years China has grown at least 11% annually in real terms, as very high levels of capital investment and a rapidly growing urban population have spurred its tremendous growth:

“Indeed, Chinese economic growth springs largely from two sources. First, high savings rates finance robust growth in capital spending. Second, migration of millions of rural under-employed workers gives the teeming factories in the coastal provinces a source of cheap labor.”5

China’s average saving and investment ratios from 1978 until 2007 were nearly 38% of GDP. In 2003 the ratios sky-rocketed, reaching an estimated 51% of GDP last year,6 while the share of income going to labour fell from 51% in 1991 to 38%7 in 2006, massively increasing profits.

Capitalist restoration and the restructuring of industry

The slaughter of Tiananmen in 1989 removed the final social obstacle to the Chinese Stalinist programme of capitalist restoration. Through the course of the 1990s the butchers of the democracy movement completed the demolition of the central plan and its replacement with state-supervised capital accumulation.

This was no smooth process. Tiananmen was the result of the collapse of the plan during the 1980s, leading to growing unemployment and inflation. With the working class crushed and atomised, the Stalinists wasted no time. State-owned enterpises (SOEs) were given profitability targets and some autonomy to adjust prices and thus avoid losses. Secondly, they stripped away state enterprises’ “social welfare burdens” – the provision of hospitals, schools, housing and other administrative liabilities that had long been managed directly by SOEs and funded out of their own revenues. Finally, in the mid-1990s the government recognised that many state enterprises were chronically unprofitable and they were shut down.

In the absence of formal bankruptcy procedures, enterprises were not disbanded and employees did not enter the formal ranks of the unemployed, but the statistical discrepancy could not hide the truth. Instead, workers continued to receive nominal payments from the workplace or from local budgets and only if funds were available at that. Between 25 and 30 million workers were sacked. As a result, formal enterprise subsidies fell dramatically, from more than 6% of GDP in the early 1980s to only 0.1% of GDP in 2008.8

In 1978, at the beginning of the reform process, the authorities determined nearly every price in the economy at the retail, wholesale and farm gate level. Twenty-five years later the number of controlled prices had fallen to well under 10% of the total in energy, utilities, food staples and various service categories such as transportation, telecommunications and healthcare.

Investment and capital accumulation

By the late 1990s the pre-conditions for the rapid advance of Chinese capital were in place. The demolition of the plan meant a mass of means of production was transformed into fixed capital for free. This, combined with the accelerated growth of a Chinese working class, atomised and vulnerable to exploitation at very low rates of pay, meant profit rates were very high and growing. As the integration of the domestic Chinese – now capitalist – economy into the newly opened globalised world ensured, a virtuous cycle ensued. More investment accelerated profitability, dragged ever more millions of workers into the orbit of capitalism, generated ever more profits providing the funds for increased investment. Far from this mass of fixed capital pointing to over-accumulation and consequent falling profits, it raised them:

“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 restructuring in 1997-99, and the accelerated integration of China’s abundant labor in the global economy.” 9

As Graph 1 illustrates the trend over the last ten or so years has been for profit rates to rise steadily.

From the turn of the millennium onwards huge investments in heavy industrial capacity were spurred by growing domestic demand and record profits. The state’s credit restriction and fall in demand in 2003-04 could have led to retrenchment in investment and a spate of closures as in 1993 and end of the century. However, this time China’s firms took significant market share from their global rivals, both inside and outside the country.

The WTO and the world economy

Marshalling huge amounts of capital year after year would not on its own have allowed the huge wave of profitable expansion. It also required large reserves of cheap labour to exploit. The integration of China into the capitalist world market and the subsequent rapid rate of urbanisation have massively increased the supply of labour that can be exploited by world capitalists.

After joining the WTO in 2001 about 150 million Chinese joined the global workforce to produce international traded goods on the cheap. Some 97 million Chinese, two-thirds of the US labour force, have moved to urban areas since 2001. Manufacturing and services have gained 88 million workers at the expense of agriculture, which lost 47 million people.

The urban population has increased from 36% of the total population in 2000 to 44% in 2006. The transformation of subsistence farmers into workers is the key to explaining the significance of this shift. It is not just the growth of the workforce that counts, but the proportion that is now involved in capitalist production. This year per capita output in sectors like industry and services is US$5,299 per worker compared to US$954 per worker in agriculture, and much of this agricultural output is non-traded subsistence farming, given only a notional value for comparative purposes.

The benefits of this super-exploitation for and by imperialism cannot be underestimated. It has massively raised productivity and so reduced inflation worldwide. A Federal Reserve study suggests that China lowered inflation by as much 1% a year in the US.10

Chinese imports lowered the cost of the reproduction of labour power worldwide and so raised the world rate of profit. For while the value of wages fell, rises in productivity meant that the value of the commodities purchased by workers fell faster, so raising living standards, even while incomes in the US barely grew.

These trends were so strong that although raw material prices began to rise from the late 1990s onwards, the price of manufacturing production continued to decline until August 200711

The left’s myopia

For the majority of leftist commentators on economics China’s significance is a bubble which is about to burst. The schema essentially goes like this:

The world economy is stagnant, suffering from chronic over-capacity in manufacturing, with low rates of profit, investment and output. Since the end of the dotcom boom in 2000 US consumer borrowing on the back of rising house prices allowed strong consumer demand to temporarily power US growth. In turn this enabled China to grow by exporting consumer products to the US.

But, they continue, with the ongoing collapse of the US housing market and credit crunch, borrowing and spending will come to an end and as a result China’s exports will stop shipping. Since China has been responsible for 20% of global growth in the last five years, sucking in the world’s exports, we are set to experience the deepest crisis in decades. And so, they conclude, global crisis reminiscent of the 1930s Great Depression will wrack world capitalism.

“China, seen by some as the “saviour” of the system, depends on US consumers . . . If the US is removed from the equation China is a net importer of goods, many of them parts produced elsewhere in the region, which are assembled in China and re-exported to the US. Recession in the US will impact across this region.”12

Lynn Walsh of the Socialist Party says that the credit crunch “marks the end of the recent phase of globalisation, which has been dominated by finance capital and a frenzied short-term drive for profit. For a few years, this promoted rapid growth in China and to a lesser extent the US, the binary axis of the world economy. Now it has turned into its opposite, with a recession in the US that will drag China and the rest of the world down with it.”13

Walsh determined to prove the catastrophe is ever just around the corner asserts that;

 “The rapid growth of the Chinese economy over recent decades has been structurally dependent on export growth, using the foreign currency revenue from exports to finance investment and the purchase of raw materials. The switch to dependence on internal demand would mean a painful readjustment, which could only take place over a considerable period of time.”14

But does Chinese capitalism “depend” on US consumers or exports in general for its expansion? Does a decline in the export-import dynamic between China and the USA inevitably mean world recession and the end of globalisation?

The headline figure for China’s exports is that they are equivalent to 37% of GDP, up from 15% in 1995 and 3% in 1970. Harman, following Martin Hart-Landsberg and Paul Burkett of Monthly Review,15 claimed that in 2002 exports accounted for 70% of China’s growth,16 based on the very high proportion of Chinese exports relative to GDP.

But the export/GDP ratio is very misleading because it compares two incompatible concepts; exports are defined in terms of turnover while GDP is measured in value-added terms.17 Once the imported component of exports is accounted for and an adjustment made for the amount of new value added in their production in China, a better estimate is probably around 9% of GDP.

This suggests that exports have been responsible for around 2-3% of total annual GDP growth on average in the last decade (i.e. a quarter or less of total growth).18

Even if we take the headline figure for China’s exports – 37% – most of these exports do not go to the US. Europe and the rest of Asia are more important and growing in importance with each year. Exports to the US account for 19% of the total last year, less than the EU and much less than the 31% share going to Asia-Pacific countries (minus Japan).19

As China’s exports have slowed to the US they have been re-directed particularly to the emerging markets of Brazil, India and Russia:

“China’s growth in exports to America slowed to only 5% (in dollar terms) in the year to January, but exports to Brazil, India and Russia were up by more than 60%, and those to oil exporters by 45%. Half of China’s exports now go to other emerging economies.”20

Moreover, history shows the likely impact of a US recession on Chinese exports and the effects of any decline in turn on China’s overall growth. The bureaucracy is terrified of the repeat of a Tiananmen Square uprising – and so, when in 1997 and 2001 export growth collapsed the economy did not, and “a key reason is that counter-cyclical government-led capex [capital expenditure] was able to largely offset the weaker exports such that overall economic growth remained robust.”21

The 2001 dotcom recession is revealing in that China – like India, Indonesia and Japan with large domestically oriented economies – escaped relatively lightly, while small export economies such as Hong Kong, Malaysia, Singapore and Taiwan went into sharp recession.

This is not to underestimate the impact of the last two crises on China’s exports:

“During the Asian financial crisis [1997-98], China’s export growth plunged from a peak of 30%YoY in May 1997 to -11%YoY in November 1998. After the internet bubble burst, China’s export growth dropped from a peak of nearly 40%YoY in March 2000 to barely zero growth in October 2001.”22

But this demonstrates that, despite these falls, the effect on China’s economy overall was marginal; GDP slowed by about 0.5 in 2001, despite a very large negative export shock, a shock that was larger than most commentators are suggesting China will experience in the next two years.23

And the same pattern appears to be happening in this cycle. When adjusted for the rise in the value of the Yuan, export growth in 2007 was at its lowest level since 2001, yet growth powered on.24 And this was because 95% of China’s 11.2% growth for the year up to the start of Q4 2007 came from domestic demand.

In short, the exceptional export surge since 2001 is largely cyclical and rests on the back of historically high global growth. The underlying structural cause of Chinese capitalism’s prolonged expansion remains the huge supplies of capital and labour that have been mobilised over several decades.

Reflecting its origin in a Stalinist bureaucracy and keeness to maintain its cohesion and dampen social opposition to it, an overriding concern of the Chinese government is to ensure a pace of growth which is rapid enough to provide enough jobs to absorb the estimated 10-20 million workers who swell the urban population each year.

As The Economist noted recently: “. . . less than 15% of China’s investment is linked to exports. Over half is in infrastructure and property.”

But past investments pale into insignificance compared to the state-backed spending on infrastructure undertaken in the last five years and planned for the next decade or more.

In February The Economist reported that between 2001 and the end of 2005 more was spent on roads, railways and other fixed assets than was spent in the previous fifty years. Between 2006 and 2010 $200 billion is expected to be invested in railways alone – four times more than in the previous five years.25

It is the same story with roads. Since the 1990s China has built an expressway network that is second only in length to the US’s interstate highway system. By the end of 2007 some 53,600km of toll expressways had been built. The government also plans to build 300,000km of new rural roads between 2006 and 2010, an increase of nearly 50%.26

The US highway construction programme after World War Two was a pivotal factor in laying the basis for the post-war boom in the US, since it massively cut the costs of continental transport and communication for capitalist industry – something the Chinese plan to emulate.27

In the past couple of years investment in rail has grown considerably. The Economist says:

“This year’s target is $42 billion, compared with a total of $72 billion in the preceding five years. World Bank officials call it the biggest expansion of railway capacity undertaken by any country since the 19th century.”28

China had 78,000km of track at the end of last year. By 2015 they plan to increase this to 120,000km which, if realised, means laying 60% more track in the next eight years than was built since 1978.

Finally, the government announced in January this year that it planned to add another 97 airports by 2020 to the 142 China had at the end of 2006.

These capital investments – amounting to hundreds of billions of dollars (see table 2 below) naturally provide a considerable source of demand for both Chinese industry and overseas firms in heavy industry and the capital goods sector. And given the bureaucracy is sitting on top of $1.7 trillion worth of foreign reserves and huge budget surpluses, it clearly has what it needs to “prime the pump” should domestic growth levels fall so far as to impede job creation.

And the government has another “advantage” when it comes to taking its plans off the drawing board and bringing them to fruition; it is a brutal political dictatorship that has not hesitated in the past to uproot dozens of villages and thousands of residents that get in the way of “development” plans.

But despite the scale of these infrastructural developments they are by no means the main source of dynamism for Chinese capitalism. State spending only amounts to 5% of overall capital spending in China. Over the last decade or two state outlays are estimated to have contributed only about 1% a year to GDP growth,29 the majority of investment being financed by firms’ retained earnings and bank loans.

China’s banks

Another recurrent theme of leftist China commentary is that China’s banking sector is insolvent, weighed down by bad debts and non-performing loans. Chris Harman claims that high rates of fixed capital investment mean that:

“The result is a relatively low rate of profit which is compensated for by the willingness of the banks to lend to enterprises at low rates of interest – and by a parallel willingness not to push loss-making enterprises into bankruptcy, so that the banking system is owed vast, probably unrepayable debts. The official estimate for the ‘non-performing loans’ of the banks is 20% of all loans – an unofficial estimate suggests 45% of GDP.”30

Harman’s description of a Stalinist bureaucracy unwilling to push firms into bankruptcy could not be a less accurate description of China from the mid-1990s onwards. And just as he underestimates the ruthlessness of the bureaucracy so he seriously misestimates the health of the banking system.

Since 1998 the government has spent nearly US$500 billion to write down bad debts and replenish bank capital, and removed an even larger amount of nominal loans from banks’ balance sheets into state-owned asset management companies. The vast majority of the bad loans made during the 1990s boom-bust cycle have either been cleaned up already or will be dealt with finally in the very near future. From an average level of 25% non-performing loans or more at the beginning of the decade, the BOC, CCB and ICBC – three of the four main Chinese banks – now report ratios under 4%.

The re-capitalisation of the banks was preparation for their privatisation from 2004-05 onwards. Partly as a result of China’s accession into the WTO, this included the sale of a proportion of banking assets abroad. As of mid-2007 total foreign direct investment in the Chinese banking system exceeded US$20 billion. Three of the “big four” state commercial banks are now roughly 20% owned by foreigners, although the largest bank the CMB remains wholly Chinese owned. The average market holding among all listed banks is on the order of 30%.31 As late as 2001 the figure would have been zero for every bank in the chart. The government still imposes a 25% total foreign ownership cap on all banks, with no more than 20% by a single outside investor. Nonetheless the origin of Chinese capitalism in the Stalinist central plan, means that China’s domestic capitalists and their state capitalist overseers retain overwhelming control of their domestic banking system and this will be critical as China seeks to develop its financial power abroad in the immediate future.

China’s consumer demand

Chris Harman has previously excluded the possibility of China’s domestic demand offsetting any decline in export rates as he believes the working class and peasantry are too poor and the middle class are too small.32

“The idea that China could rapidly switch to stimulating domestic demand is fanciful. Low wage levels and huge inequalities mean that domestic purchasing power is extremely low.”

Consumer spending in China has remained steady over the last decade contributing around 4-5% a year to GDP growth- with wages falling as a proportion of GDP even while living standards have risen quickly. Consumption expenditures remain dwarfed by capital investment.

There is much debate over the size and spending power of the Chinese urban classes, but even the most conservative estimates say there are about 100 million urban middle class consumers (growing at about 12-15 million a year), with a spending power of about US$250 billion a year.33 This is confirmed by shifts in the consumption pattern of Chinese society.34

Take, for example, the number of consumer goods per 100 households TVs rose from 4 out of 100 in 1984 to 94 out of 100 in 2003. Washing machines went from 1 to 59 out of 100 and fridges from none to 46 out of 100.35

“By the end of the 1990s, China’s average level of daily per capita calorie intake fell only 10% short of the level of developed countries . . . Aggregate meat consumption has grown by more than 50% over the past decade. Per capita meat consumption has also grown considerably, mainly due to a higher demand for pork and poultry, the consumption of which has risen by about one third over the past decade.”36

Imports of food products have grown from $4,130 millions in 1992 to $9,435 millions in 2000. In 2006 it reached $23,634 millions. This is an increase of 472% in just 14 years.37 As UBS notes, “there has been a visible acceleration in household expenditure over the past three years, with no sign of slowdown to date,”38 mainly as a result of the growth in rural incomes. On the back of very rapidly rising food prices in 2007 these incomes grew faster than the urban sector for the first time in decades. But, in addition, wages in urban collectives rose at an average annual rate of 13.6% in 2002-06 – up from 9.8% in the preceding five year period – underpinning a rise in retails sales.

In fact already this year China has readjusted its output towards domestic consumer demand:

“We estimate that domestic demand contributed 11% to overall GDP growth in 1Q. Consumer demand, as reflected in retail sales, grew 20.6%Y in 1Q (+21.5% in March). After adjusting for higher inflation in the period, retail sales gained 12.3% in real terms, similar to that in 2007.”39

And this change is reflected in the growth of imports and their composition. Imports related to export have declined while capital goods for the domestic market have increased:

“China’s merchandise imports rose 44.3% through February, far outpacing the sequential trend growth in exports. This is a significant change in the previously persistent trend of lagging import growth in the past three years and is consistent with the solid domestic demand trend in China . . . The import data by end use also show that domestic demand-related goods are behind the latest surge, while imports for export-related production have slowed.” 40

Clearly, while large, this level of final demand cannot be a substitute in the short or medium term for business investment. Industry will remain industry’s best customer for some time ahead. But it does provide a growing outlet for both Chinese and overseas multinationals which confront saturated markets in Europe and North America or a range of consumer goods.

China and the world

China’s economic prospects are critical to the fate of globalisation. But this is not because China’s dependency on US consumers is about to bring it low, or that its exposure to exports in general is fatal to its expansion.

Rather, China increasingly powers the world economy. As one report notes: “emerging economies’ trade with each other has risen faster and now accounts for over half of their total exports. Emerging markets as a group now export more to China than to the US.”41

The growth of China has been critical to the continuing growth of the so called “emerging markets” that are disproportionately dependent on the export of raw materials. Over the last four years not only has the absolute proportion of imports consumed by China risen, so has their impact on world demand, as is clear from Table 3 from JP Morgan:

China’s internal capital accumulation, based on huge surplus profits and capital investment, combined with increasing internal consumer demand (and increasingly also with foreign investments42), props up a growing number of countries. To put it bluntly: the world depends on China, not the other way around.43

Capitalist accumulation is certain to slow down. In the short term, the recession in the US and slower growth in the rest of the world will have some impact on China as exports decline. But as we have explained this is not likely to derail the factors that lay behind China’s three decade expansion: reserves of labour, abundant capital, high productivity and profits. China has very significantly offset the impact of the US slowdown on the world economy and inside the US itself, and will continue to do so.

However, over the next decade or so China’s advantages will be eroded. First take labour. The Chinese labour force will peak around 2015 due to the one-baby policy adopted in the 1970s. Total available labour increased by about 10 million per year in the 1990s and the first half of this decade, it has now fallen to only 6 million each year and between 2010 and 2020 the net figure will be around zero, as deaths equal births.

More importantly even, the rapid pace of urbanisation is slowing and in the foreseeable future could halt. Some 100 million rural migrants already work in factories, drawing in a sizeable portion of the younger rural population. Merrill Lynch estimates “45-50 million young surplus workers remained in the rural areas as of end-2006. Assuming a migration rate of 12-15 million a year, the well will run dry in 2009-10.”

In China export manufacturers now routinely complain about the difficulties in finding cheap, available workers. This decline in the reservoir of super-exploitable workers is already having an impact upon productivity, with wages rising as a consequence of this “tighter” labour market. Chinese business’s unit labour costs have begun to rise after declining at a rate of 4.5% annually between 1994-2004. In 2005 labour costs rose by 1.5% and in 2006 by 2.9%. In turn some Chinese firms will not be as competitive as they were in certain (mainly labour-intensive) lines of industry, losing market share to other Asian countries such as Vietnam.

Future investment

Is there over-investment in China? At 51% of GDP it could appear to be the case. Yet profit rates are rising and suggest otherwise.44 Part of the answer is that in recent years 10%45 or more of this investment has been in residential housing,46 a consumer durable rather than a capital value-producing investment.47 Questionable Chinese GDP statistics48 and disputes about the price of land, a nationalised asset available to the state at very low prices, add further doubt to the true cost of Chinese investment.

What’s more, asset inflation in housing is starting from a very low base. There was no housing market at all in China before 1996 and, while prices are rising, they are falling as a proportion of incomes, as wages increase even faster. This may lead to problems, but the underlying expansion of productive capacity has not yet led to a cyclical bust, as it did in the mid- and late 1990s.

This is because as Chinese output has expanded it has moved up the value chain into higher technology goods, which have maintained profit rates and meant that Chinese firms have gained an ever increasing market share in markets outside of their traditional strongholds in low price consumer goods, and also in a burgeoning domestic market.

The effect of a decline in investment rates is debatable. Most bourgeois analysts suggest it will lead to the rate of growth in GDP slowing to 7-9% over the next 10 to 20 years.49

Irrespective of the likelihood of this or not, as China’s dependence on imported raw materials encourages it to revalue the Yuan, which has risen 18% against the US dollar since its float, its financial power will begin to match its industrial strength. On present trends China’s nominal dollar GDP will surpass Germany in 2008 and Japan by 2010.

Conclusion

The left has wilfully underestimated the historic, and in many way unique, consequences of capitalist restoration in China – the world’s most populous country – and the effects of its step by step integration into the world market in an era of unprecedented globalisation.

Left commentators have insisted on China’s fatal vulnerability to the, hitherto larger and more powerful, imperialist economies, failing to detect the major underlying shifts in the balance of global economic power.

The key levers of economic growth – of capital accumulation – in China are its massive reserves of labour and capital mobilised by a powerful native ruling class. In recent years these long term structural characteristics have been supplemented by equally powerful cyclical factors.

In the last 20 years, domestic capital boom and bust cycles have hit China and stalled or slowed growth – indeed far more than the internationally generated recessions of 1997/98 and 2001, or 2007 did.

But the ability of China to ride out the effects of the US credit credit crunch will burst the left’s schema, based as it is on the ongoing stagnation of the world economy and its dependence on a series of bubbles. 

Endnotes

1. Minqi Li , “The Age of Transition: the United States, China, peak oil and the demise of neoliberalism”, Monthly Review Press, April 2008 p20

2. Under-consumptionism is the idea that capitalism cannot sell its output because the working class cannot buy, i.e. consume, enough.

3. Chris Harman, “China’s economy and Europe’s crisis”, ISJ 109. At the 40th anniversary commemoration of May 1968 in London, Harman compared the recent growth in the world economy to the short-lived upsurge of 1972/73. Harman can only concede the possibility of capitalist advance when he thinks it’s over.

4. A full percentage point higher than the next most successful performer (Taiwan). The consensus among academics who doubt government statistics in China suggest this figure is 9%, still higher than any other country.

6. Other “Asian” miracles (Japan, South Korea, etc) have mobilised huge savings and invested them in this fashion, but none on this scale and for as long. Between 1965 and 1995 the Asian high-growth nations reported average gross domestic saving and investment rates of just over 30% of GDP; for Japan in 1955-85 the figure was 33% of GDP.

7. “. . . the share of output going to workers declined from 24% in 1998 to 17% 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.

8. UBS, “How to think about China”, Part 1 (2008 Edition) 10 January 2008.

10. “Is China exporting deflation?”, International Finance Discussion Paper No 791, Federal Reserve Board, January 2004.

11. Prices for US imported goods from China rose 0.7% in March 2008 and are now up 4.0% over the past year. Prices throughout the Pacific Rim, which account for one third of US imports, rose 0.6% and are up 3.0% year on year.

12. Joseph Choonara “Shocking instability that is built into capitalism” Socialist Worker 22 March 2008

15. Martin Hart-Landsberg and Paul Burkett, “China and socialism – Market reforms and class struggle”, Monthly Review Press, 2005

16. Chris Harman, “China’s economy and Europe’s crisis”. ISJ 109

17. “In order to arrive at the actual role of exports in the economy, we need to strip out associated import content to find out how much of export revenue actually accrued to the domestic economy; this gives us a measure of external demand as a share of overall effective final expenditure. And next, we want to convert that domestic content share into value-added terms by subtracting input purchases from other domestic sectors. Our most recent estimates suggest that the domestic content of Chinese exports is around 45%, i.e., that 55% of the total value of export shipments represents imported raw materials or manufactured components. If we apply this ratio to the headline export/GDP ratio, we find that domestic export content accounts for 14% to 16% of GDP. According to official data, industrial manufacturing accounted for 43% of GDP in 2006 on a value-added basis . . . Thus, if we take the 43% industrial share of GDP and multiply by the 18% export share in industrial manufacturing, we end up with a ‘true’ export share of 7.8% of GDP. But this is just for goods exports, of course. If we add in our guess at value added from trade services and other income, we come out with a likely final ratio of just over 9% of GDP.”

 18. UBS How to think about China, part 6 p30 Indeed in the first quarter of 2008 exports actually subtracted from Chinese GDP.

19.          Hart Landsberg and Burkett claim that “In short, China is taking up a rising share of an increasingly stagnant total of regional exports.” (China and Socialism – Market Reforms and Class Struggle: Monthly Review Press p88) In fact the growth of world trade has accelerated over the last five years, nearly doubling since 2000, while intra-regional trade in developing Asia has risen from 22% of exports in 1980 to 40% in 2004. This is still lower than North America 46% and Europe 64%. While China is certainly a major competitor with other local Asian rivals, far more important has been the rise in China’s own imports by 323% between 2000-06 and the growing proportion of Asian imports in them.

20. From Economist.com “Emerging markets; The decoupling debate”, 6 March 2008 www.economist.com/daily/news/displaystory.cfm?story_ id=10808782&top_story=1.

21. Morgan Stanley, Greater China Economics Issues in Focus p6, 5 March 72008

22. Morgan Stanley, When Exports Weaken, Government Capex (capital expenditure) Steps In, March 08

23. “. . .the correlation between US import growth and growth in Chinese industrial production is quite low . . . Although American import growth plunged in 2001 as the US economy slid into recession, growth in Chinese industrial production barely budged. More recently, US import growth has been weakening, but Chinese IP [industrial production] growth has strengthened. There must be much more to Chinese economic growth than simply exports to the United States . . . A downturn in the US economy surely would cause the overall rate of Chinese GDP growth to slow, but it would not lead to a collapse of the Chinese economy, as recent history demonstrates.” Wachovia op cit.

24. According to World Bank estimates, a decline in US consumption of 1% would cause a slow down in Chinese GDP growth of 0.5%. To put this in perspective, the largest fall in US consumption in any recession since 1960 was in the very deep 1980 recession when it fell -1.2%.

25. “China’s infrastructure splurge” The Economist, 14 February 2008

26. World Bank China Quarterly Update, January 2008 http://siteresources.worldbank.org/INTCHINA/Resources/318862-1121421293578/cqu_jan_08_en.pdf

27. Logistics costs in China amount to 18% of GDP in China compared with 10% in America. The massive investment in roads and especially rail aim to cut this margin.

30. Chris Harman, ”China’s economy and Europe’s crisis “, ISJ 109 February 2006 http://www.isj.org.uk/index.php4?id=160&issue=109

31. Our previous PR9 estimate of Chinese domestic bank ownership of 95%+ was evidently a bit out, based as it was on slightly older Deutsche Bank figures.

32. “But [the middle class] is not big enough to absorb the burgeoning output of Chinese industry profitably.” True, but the trade off between final consumers and exports is a false way of posing Chinese capitalism’s dilemma.

33. The upper class (that is the layer that enjoys a lifestyle at or above a middle class family in today’s G8 countries) may number 25 million or 2% of China’s total population.

34. “A rise in per capita income from low levels is associated with an increase in per capita food consumption and a shift in the composition of household expenditure away from primary products, particularly food, towards manufactures, such as textiles and clothing, wood and paper products, machinery (e.g. electrical household equipment), and chemicals (e.g. pharmaceuticals). Household demand for services also increases, particularly for transport (especially personal transportation), electricity and housing (including furniture and consumer appliances).” UNCTAD Trade and Development Report 2005

39. Denise Yam, Qing Wang and Katherine Tai, “China Imported Soft Landing in Sight”, Global Economic Forum, Morgan Stanley, 17 April 2008 Hong Kong www.morganstanley.com/views/gef/archive/2008/20080417-Thu.html

40. JP Morgan, Economic Research Note “China’s import strength buffers global economy”, 4 April 2008. Also “Urban fixed asset investment actually accelerated in March, contrary to our expectation, bringing 1Q up 25.9%Y (+24.3% in January-February).”

41. Wachovia op cit. Morgan Stanley says: “within Asia, China has become the growth engine, replacing the US.” MS Research Asia Pacific 1 May 2008

42. In the first quarter of 2008 China’s foreign direct investment (FDI) has already surpassed that of the whole of 2007.

43. “Asian domestic demand, based on thirteen volume indicators, is now larger than the US. Asia current dollar GDP is 59% of the US size, but its true size is masked by cheap currencies and labour costs. Asia’s large domestic market reinforces our view that Asia is now less dependent on the US than ever before, and capable of a soft decoupling from the US downturn. Drivers of Asian domestic demand, and particularly China, are now at least as important as global factors.” “China The Engine!”, Morgan Stanley Asia Pacific Strategy Asia No 1, 1 May 2008

44. “We think the over-investment issue reflects data quality problems rather than a true underlying problem. The reported investment-to-GDP ratio looks alarming, but it is significantly overstated due to an over-estimation of investment, under-estimation of consumption and under-estimation of GDP. Data on corporate earnings suggests a very different picture of the health of investment, showing that retained earnings are a key source of investment financing and that the return on investment is not only high but has been rising since the start of the decade.”, Goldman Sachs, “China’s investment strength is sustainable”, Brics and Beyond, November 2007 http://www2.goldmansachs.com/ideas/brics/book/BRICs-Chapter4.pdf

45. “With completions at 477 million square metres in 2007, at an average 90 square metres per unit, we estimate China completed about 5.3 million units.” Or five times US production. Morgan Stanley, “China The Engine!”, Asia Pacific Strategy Asia No 1, 1 May 2008

46. “One final note concerns China’s slums – or, more accurately, the lack of them. Visitors to Mumbai, Jakarta, Mexico City, Lagos and virtually every other large city in the developing world cannot help but notice the uncontrolled growth of ‘slum’ areas, often involving millions of relatively destitute and marginalised people in informal housing without access to clean water, sewage or electricity. However, travel to Beijing and Shanghai and you won’t find anything similar; the city centre leads to more or less orderly residential areas, which then fade out into farmland.” UBS, How to think about China, part 6, March 2008

47. Capital investment has been consistently around or slightly above 35% of GDP for a long time.

48. When Chinese regional GDP figures are added together they are consistently 2-3% higher than the national GDP figures.

49. “Subtracting 13% of GDP from today’s domestic savings just brings the ratio back down to 38% of the economy – i.e. exactly the level that kept real growth at 9.7% y/y on average for the past few decades . . . based on current trends China could afford to lose nearly half of its national savings over the longer term and still maintain one of the fastest growth rates in the world.” UBS, op cit p40

Sat 04, October 2008 @ 13:27