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Can China’s rescue package avert recession?

A long awaited economic stimulus package was unveiled by China’s cabinet, the State Council, on Sunday 9 November. The package, claimed to be worth 4 trillion yuan or $586 billion, was designed to have maximum impact on market ‘sentiment’ in China and worldwide. Like clockwork, China’s stock market jumped 7.3 percent on the news, and most global stock markets rallied. This underlines China’s role as an ‘elephant’ in the global capitalist economy – it accounted for 27 percent of global economic growth last year, more than any other nation, and Merrill Lynch forecasts this will rise to 40 percent next year. The financial speculators went crazy on Monday, especially for commodities like oil and metals, hoping China’s formerly huge appetite for raw materials will now be revived. Oil prices rose 5 percent. Under closer examination, however, China’s plan is not as spectacular as first appearances suggest.

Coming less than a week before president Hu Jintao attends crisis talks in Washington with leaders of the world’s major economies, this package was clearly timed to boost his government’s standing and send a signal that China would “do its part” to stabilise the global capitalist economy. Politicians like Britain’s Gordon Brown are pinning their hopes of avoiding a global slump on the “deep pockets” of China and other Asian powers. Brown argues that China should use some of its huge foreign exchange reserves – approaching $2 trillion worth – to increase the capacity of capitalist loan agencies such as the IMF to meet the crisis.

IMF boss Dominque Strauss-Kahn declared himself “very happy” with Beijing’s package. The package signifies that China’s government, earlier than most other states, realises the limits of monetary policy: interest rates cuts and easing of bank credit conditions. This is true even when – as has become common recently – these measures are taken in concert with central banks in other countries. Beijing therefore ahead of other governments has entered the next stage of capitalist crisis management – increased state spending. This in itself is a sign of the ruling ‘communist’ party’s morbid fear of what a deep crisis can mean for social ‘stability’ and their own rule.

China’s economy has experienced an abrupt turnaround in the last two months. “The golden years have shuddered to a dramatic halt,’’ commented Stephen Green, of Standard Chartered Bank in Shanghai. The suddenness and scale of the downturn has shaken China’s leaders, who only weeks ago were riding on a wave of Olympic euphoria. “We have entered a hard time,” one unnamed cabinet official told China Daily. “Without radical remedies, it will become even harder.” The vice-president of Bank of China warned the recession in the US, Japan and Europe would have a “huge impact” on China. The developed capitalist economies will shrink by 0.3 percent on an annual basis next year, according to the IMF, the first such fall since the Second World War. Warning of what lies ahead, this top banker added: “The financial crisis will technically precede economic and political turmoil by eight to 12 months.”

How much?
At first sight, Beijing’s fiscal stimulus package is very, very big. Four trillion yuan is equivalent to one-fifth of China’s gross domestic product (GDP). It is enough to build 20 Three Gorges Dams or stage the Olympics 14 times. The State Council’s statement stressed they were acting “swiftly and forcefully”. Jing Ulrich, a leading economist at JPMorgan dubbed the package “a New Deal, with Chinese characteristics”. The package, stretching over two years (until the end of 2010), covers ten areas including infrastructure spending, tax cuts for business, investment in rural areas, low-cost housing and technology upgrades. But as many commentators have pointed out, the package is suspiciously thin on detail. Under closer examination much of the extra spending is not actually extra, but rather a headline grabbing re-packaging of spending commitments already on the table.

“The government’s announcement appears to exaggerate the size of its plan by including projects already under way, including reconstruction from the devastating May earthquake in China’s southwest,” observed an economist at Moody’s. “The exaggeration highlights the government’s desperation to revive sentiment, which is perhaps the key factor to sustaining growth amid global turmoil,” he said.

As Tom Holland in the South China Morning Post commented, “there is considerable doubt about how much of it consists of what analysts examining Japan’s supplementary budgets of the late 1990s used to call ‘real water’ or genuinely new government spending.” As this columnist pointed out, the package seems to include the one trillion yuan already allocated for earthquake reconstruction (but not yet invested). It also seems to overlap with an even bigger, 5 trillion yuan plan to build roads, railways, port and airports, unveiled by the Ministry of Transport three days earlier. With pre-existing elements taken out, the new State Council package is worth half the headline figure, around 2 trillion yuan. This could still have a significant effect on the economy, of course, as it is almost twice the size of the Bush Administration’s $160 billion stimulus package from earlier this year, and the US economy is so much bigger.

“Too tight, too long”
China’s central leadership is clearly alarmed by the depth and speed of the economic slowdown. And well they should be. China’s top economic managers including Premier Wen Jiabao are increasingly coming under fire for running monetary policy “too tight for too long” in their battle against inflation. This policy was formally abandoned at Sunday’s State Council meeting in favour of a “moderately loose” monetary policy. Policy shifts predate this meeting, however, with the central bank cutting interest rates three times since September, in conjunction with other central banks including the Fed, ECB and BOJ. A raft of other measures including restored rebates for exporting companies have been put in place as export companies feel the squeeze of the global downturn. But these measures have gained little traction. Exporters complain rebates are not much use if there are no export orders to claim the rebates on. They complain that foreign partners are increasingly breaking contracts – US companies are now believed to owe a combined $100 billion to Chinese exporters.

Lower official lending costs, as has been shown in Western economies, are also not a miracle cure during a generalised liquidity squeeze. In China’s case, much investment is not dependent on bank loans – major state-owned companies have sizable capital reserves. But why should they invest if the market is shrinking, especially when they are already packing huge levels of overcapacity. Privately-owned companies complain of similar conditions to the West, i.e. a “credit crunch”, with banks recalling loans despite the looser monetary policies adopted by the central bank in recent weeks.

The gloom is summarised by the performance of the stock market, which has become a giant “wealth-destroying machine”. In October the Chinese stock market lost 25 percent of its value, the worst monthly performance since 1994. Desperate investors were convinced the government would intervene to place a ‘floor’ under share values to prevent the Shanghai Composite Index falling below 2,000 (from over 6,000 a year ago). When this failed to materialise, it was taken for granted that 1,800 points represented the market’s ‘bottom’. But, as one commentator put it, “the death spiral continues”. Today, the 1,500 mark is being touted as the trigger level for massive government intervention.

The stock market collapse has squeezed company profits (much of which have come from stock market speculation) as well as obliterating the savings of middle class and better-paid working class families. Last month, the government pushed state-owned enterprises to support the stock market by buying up large tranches of their own shares. A new “stabilisation fund”, possibly worth 800 billion yuan, is under discussion to engage more heavily in buying up shares in 50 state-owned companies listed on the stock market. This is an undeclared de facto reversal of the part-privatisation of top state-owned companies in the recent period. The result of this privatisation/market-listing policy, masterminded by Wen Jiabao and his economic team, has been a complete fiasco. All that has been achieved is the destruction in record time of huge sums of paper wealth – including the life savings of many small investors. A salutary example is the oil company, PetroChina, which has lost 80 percent of its market value – about seven trillion yuan – since it was listed one year ago. This puts Beijing’s four trillion yuan stimulus plan into perspective. Small investors who bought such initial public offerings when the market was at the top have been pauperised.

Driven by fear
The new stimulus package was described as “a last-ditch effort to avert a hard landing” by Associated Press. Just two months ago, most Chinese economists were complacent about the effects of the global capitalist crisis on China. The Chinese vice-president of the World Bank, Lin Yifu, said in October that the effect on China would be “limited”. Such misplaced confidence has evaporated in recent weeks. All forecasters have been busy scaling down their projections for 2009-10, with a growing number pointing below 8 percent. Stephen Green of Standard Chartered forecasts 7.9% growth for 2009, UBS forecasts 7.5%, while Credit Suisse First Boston’s Dong Tao forecasts 7.2%. For the Chinese regime, 8 percent GDP growth is the “bottom line”. Anything below this is an economic “hard landing” or recession, meaning surging unemployment, collapsing incomes and rising discontent. US journalist Tom Plate compares the Chinese economy to a 747 Jumbo Jet: “any rapid or sudden loss of velocity and forward momentum could bring the whole thing crashing down.” [South China Morning Post, 31 October 2008]

Industrial output figures to be released on Thursday, are believed to show that growth slowed to around 8 percent in the year to October. China has not seen single-digit growth in industrial output since 2001. Data for electricity and steel consumption are also telltale signs of a sharp slowdown. China Daily reported a “rapid decrease” in electricity consumption, which fell from a growth rate of 5.1% in August to 3.6% in September. “And I am shocked by the October growth rate, which is below zero,” an unnamed senior official told the newspaper. “Which means more closures, bankruptcies and job cuts,” he explained.

Infrastructure spending fell by 10 percent in the first nine months of this year, which has forced steel companies to slash output as they struggle with chronic overcapacity after years of ‘supersized’ investment and expansion. Crude steel output dropped 9.1% year-on-year in September. Difficulties in the motor and shipbuilding industries have also hit steel producers. Private car giant, Chery, has announced 5,000 job cuts and other car companies are following suit. The export slowdown has wreaked havoc on China’s shipbuilders, now the world’s biggest, with new orders dropping 34 percent in the first nine months of the year.

It is the wealthier coastal provinces – the most ‘globalised’ parts of China – that are leading the way downward. Guangdong, China’s richest province, is heading for 10.2 percent GDP growth for 2008 as a whole, a drop from 14.5 percent in 2007. Not since 1979 has Guangdong’s growth rate been this low, prompting the provincial government to launch its own huge investment plan worth 2.3 trillion yuan. Dongguan, an industrial city of seven million people in Guangdong, exemplifies the hard times facing exporting regions. The city government forecasts a long manufacturing slowdown and predicts that 30 percent of its factories could close by next year. “Nobody knows how long the recession will be… [We’re only sure] next year will be even tougher,” warned Dongguan Communist Party boss, Liu Zhigeng.

Manufacturers are demanding that governments freeze minimum wage levels and want Beijing to scrap or water down the Labour Contract Law, which is not yet one year old. One boss in Dongguan complained that since his workers read the law they refuse to work Saturday’s without overtime pay! Guangdong province is no aberration – growth is also slowing in the two other ‘engines’ of China’s economic growth, the Bohai Rim (Beijing and Tianjin region) and Yangtze River Delta. Shanghai’s growth in the first nine month’s of 2008 is below the national average.

“Uncontrolled expansion”
Clearly, the central government is under huge pressure to send the “right signals” amid the deepening economic crisis. But the central government itself is only proposing to fund a quarter of this package, 1 trillion yuan. It expects local governments, banks and state-owned enterprises to generate the remaining 3 trillion yuan. The central government imposed a 5% spending cut on all departments in the aftermath of the May 12 earthquake, a policy that still stands and translates into pay freezes and slower recruitment in the government sector.

This raises important questions about how much scope the government has to intervene to shore up the economy. Even this 1 trillion yuan of spending will force the central government to issue treasury bonds and run a budget deficit. The general consensus is that China’s state finances are fairly sound especially given its low debt ratio of 25% of GDP. But as the South China Morning Post warns: “Some analysts doubt the accuracy of the government debt-to-GDP figure, arguing that if you factor in contingent liabilities like losses on bad loans warehoused during the banking reform, then the ratio shoots up to more than 50 percent, Beijing will be left with far less fiscal slack.” [Tom Holland, SCMP, 11 November 2008]

Will local governments and state-owned companies comply with these policies? This is by no means certain, as the course of economic development over recent years demonstrates. One reason the manufacturing crisis has struck China so quickly is that it is not entirely the result of global crisis and falling external demand. While the rate of growth has slowed, China’s exports are still expanding and actually heading for a record year. So, what’s happened? Many businessmen and officials in coastal regions are blaming “uncontrolled expansion” rather than a decline in demand for the wave of factory closures. Simply too many projects have been started and now a classical crisis of overproduction has arrived.

Against this background, the government’s stimulus measures and emphasis on more infrastructure spending can only have a limited impact. The electricity generation sector is a good example of this. Through breakneck expansion in recent years, China now boasts a power generating capacity that is ten times the size of Britain’s. But its economy is only 3.5 times bigger than Britain’s (or less if measured in dollars). Still, certain regions experience shortages and blackouts while other regions now have a surplus of generating capacity. This is because China lacks an effective national grid system that can direct power from one region to another. Each province looks after its own electricity needs. This is just one expression of the fragmented nature of the economy, which leads to wasteful duplication and “uncontrolled expansion”.

Local governments squeezed
Another major question mark about the new spending package is the rapid deterioration of local government finances due to the property meltdown. In recent years they have been heavily dependent on land sales to balance their budgets. Property prices have fallen 30 percent province-wide in Guangdong for example, since their peak level one year ago. The Beijing Review reports that the number of cities experiencing falling house prices rose to 25 in August from five in April. A top banking official, Yan Qingmin, issued a dire warning that if the fall in property markets nationwide exceeds 30 percent, “the whole banking sector and the whole Chinese economy won’t be able to bear the impact.”

The US bourgeois economist Nouriel Roubini, whose predictions have mostly proven right in recent years, said in an article last week that “a deceleration in the Chinese growth rate to 7 per cent in 2009 – just a notch above a 6 per cent hard landing – is highly likely, and an even worse outcome cannot be ruled out at this point.” Roubini warned that China’s ability to introduce a giant stimulus package is limited by the large hole in the central government’s budget this year, following the Beijing Olympics and the Sichuan earthquake. And the idea of easing credit “will be like pushing on a string as the overinvestment of the last few years has led to a glut of capital goods.”

The government seems to have opted for big infrastructure projects despite all previous talk about stimulating consumer spending to offset falling exports. To trigger a surge in consumption from its current – extremely low – 40% share of GDP, the government must make good on its plans for more low-cost housing, free basic schooling, and universal medical insurance cover. As a recent report in The Lancet magazine showed, the phenomenon of ‘health poverty’ is now widespread throughout China, whereby families are bankrupted by illness. These are the obstacles to transforming China into a nation of 1.3 billion shoppers that could cushion the coming downturn in the developed capitalist countries. But these commitments, again a repetition of previous ones, have to date been extremely slow-moving.

Another probable explanation for the lack of detail in the government’s fiscal package is a behind-the-scenes struggle within the ruling party. Liberals are pushing for tax cuts, which only benefit one-third of the workforce, to kick-start consumption. They are also looking for faster ‘reform’ of land transfer rights to create a private property market in rural areas, which they believe will provide a base for a rural consumer boom. There are differences within the ruling group over how fast and how much to cut interest rates and over the exchange rate, an issue that could push China into an early conflict with the new Obama Administration. The tensions developing within the ruling ‘communist’ party will inevitably spill out into the open in the next period as the global crisis and China’s own crisis deepen. This will mark the end of a period of relative cohesion – in public at least – for the Chinese regime that has lasted for almost two decades.

For hundreds of millions of workers and poor farmers the economic crisis means new attacks, poverty and hardship. It also means new openings and challenges as China’s leaders become increasingly unnerved and divided. Now more than ever the masses need genuine trade unions and a fighting workers’ party equipped with a socialist programme to defeat the crisis.

Vincent Kolo, chinaworker.info

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