[Marxism] China's downturn

Marv Gandall marvgandall at videotron.ca
Sun Apr 19 21:04:15 MDT 2009

Below an article from the latest Economist which, even if inadvertently,
refutes two misconceptions about China:

a) The right-wing myth that a large state sector is economically
inefficient. If China recovers from the global downturn faster than the US,
as the Economist suggests it will, it will be primarily owing to continuing
public ownership of the commanding heights of the economy - to "the
government’s ability to 'ask' state-owned firms to spend and state banks to
lend (which) means that the government’s measures are being implemented more
rapidly than elsewhere...".

This is a legacy of the Chinese Revolution, which the Economist, foreign
investors, and other "free market" propagandists are of course loath to
acknowledge. The rueful admission that only a state which exerts effective
control over the financial and industrial sectors can "support the economy
in times like these" has shaken their confidence, reminiscent of the split
in the ruling class during the Great Depression which had to contend in it's
time with the challenge posed by the state-owned Soviet economy.

b) The left-wing fallacy that China has simply become an export-driven
appendage of US capitalism. The article serves up the reminder that "China
is less dependent on exports than is commonly believed", and that it's
downturn, while exacerbated by the collapse in global trade, preceded it and
resulted from mainly domestic contradictions - notably, it's own home-grown
property bubble and subsequent state-induced bust. "If a collapse in
domestic demand led China’s economy down, it can also help lead it up
again", it concludes - largely independent of the course of developments in
the older capitalist economies.
Bamboo shoots of recovery
Apr 16th 2009 | HONG KONG
From The Economist print edition

Signs that a giant fiscal stimulus is starting to work

THE Chinese consider eight to be a lucky number because it sounds like the
word meaning “prosperity”. And luck, combined with a massive fiscal
stimulus, may yet help the government to achieve its growth target of 8% in
2009. Earlier this year, most economists thought such growth was impossible
at a time of deep global recession, but some are now nudging up their

At first sight, the GDP figures published on April 16th were disappointing.
China’s growth rate fell to 6.1% in the year to the first quarter, less than
half its pace in mid-2007. On closer inspection, however, the economy is
starting to perk up. Comparing the first quarter with the previous three
months, GDP rose at an estimated annualised rate of around 6%, after nearly
stalling in the fourth quarter (see chart). By March the economy was gaining
more speed, with the year-on-year increase in industrial production rising
to 8.3% from an average of 3.8% in the previous two months. Retail sales
were 16% higher in real terms than a year ago, and fixed investment has
soared by 30%, signalling that the government’s infrastructure-led stimulus
is starting to work.

Exports, on the other hand, tumbled by 17% in the year to March and global
demand is widely expected to remain weak this year. This is the main reason
why some economists expect GDP growth of “only” 5% for 2009 as a whole. But
the gloomier forecasts tend both to overstate the importance of exports and
to understate the size of the government’s stimulus.

Contrary to conventional wisdom, China’s sharp economic slowdown was not
triggered by a collapse in exports to America. Its growth began to slow in
2007, well before exports stumbled, driven by a collapse in the property
market and construction. This was the result of tight credit policies aimed
at preventing the economy from overheating. The global slump dealt a second
blow late last year, but China is less dependent on exports than is commonly
believed. Exports account for nearly 40% of GDP but they use a lot of
imported components, and only make up about 18% of domestic value-added.
Less than 10% of jobs are in the export sector.

If a collapse in domestic demand led China’s economy down, it can also help
lead it up again. Not only is China’s fiscal stimulus one of the biggest in
the world this year, but the government’s ability to “ask” state-owned firms
to spend and state banks to lend means that the government’s measures are
being implemented more rapidly than elsewhere. To take one example, railway
investment has tripled over the past year.

Only about 30% of the government’s 4 trillion yuan ($585 billion)
infrastructure package is being funded by the government. Most of the rest
will be financed by bank lending, which had already soared by 30% in the 12
months to March, twice its pace last summer. JPMorgan thinks that this
credit and investment boom could lift GDP growth to an annualised pace of
over 10% in each of the next three quarters.

Jonathan Anderson, an economist at UBS, argues that the property market
could be as important as the fiscal stimulus in determining China’s fate.
After falling sharply last year, housing sales rose by 36% in value in the
year to March. Housing starts are still down, but if sales continue to
strengthen, construction could pick up in the second half of 2009. That
would also help to support consumption: about half of China’s job losses
among migrant workers have been in the building industry.

If construction does recover and infrastructure spending continues to rise,
then even if exports remain weak, China could see growth of close to 8% this
year—impressive stuff when rich economies are expected to contract by 4-5%.
There are growing concerns about the quality of that growth, however. The
World Bank estimates that government-influenced spending will account for
three-quarters of China’s GDP growth this year. The clear risk is that
politically directed lending creates more overcapacity, poor rates of return
and future bad loans for banks.

These are valid concerns. But Andy Rothman, an economist at CLSA, a
brokerage, reckons that state-owned firms mainly plan to increase their
spending on upgrading existing production facilities, rather than expanding
capacity. Also, about half of the increase in investment is on public
infrastructure. This will inevitably include some white elephants but, in a
poor country, the return on infrastructure investment is generally high.
There is no need to build “bridges to nowhere” when two-fifths of villages
lack a paved road to the nearest market town.

Bridge urgently needed

What about the risks to banks? The last time they were forced to support the
government’s stimulus policy, during Asia’s financial crisis in 1998,
Chinese banks were left with large non-performing loans. Bad loans will rise
again this time, but Tao Wang, also at UBS, argues that banks are in a
stronger position than in 1998. China is one of the few countries in the
world where bank credit has fallen relative to GDP over the past five years.
Banks have an average loan-to-deposit ratio of only 67%, low by
international standards, and less than 5% of banks’ loans are
non-performing, down from 40% in 1998.

The biggest task for China is to find a new engine for future growth. It
cannot rely on exports, nor can the investment stimulus be sustained for
long. Without stronger consumer spending, China’s growth will be much slower
than in recent years. Reforms to improve health care and the social safety
net will take many years to encourage people to save less.

Andy Xie, an independent economist based in Shanghai, suggests that the
quickest way to boost consumption would be for the government to distribute
the shares that it holds in state-owned enterprises to households, and to
force those firms to pay larger dividends. But the authorities in Beijing
are unlikely to take his advice. How else could they lean on big firms to
support the economy in times like these?

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