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Workers Hammer No. 233

Winter 2015-2016

China is not capitalist

China and the world economy: fact v fiction

In the first week of November, a US aircraft carrier conducted operations near Chinese land reclamation and construction projects in the South China Sea’s Spratly (Nansha) Islands. These islands are of strategic importance to China’s military defence and its ability to protect critical shipping lanes. Threatening China’s sovereignty, US defence secretary Ashton Carter announced that the US would make regular patrols of the area. Behind such gunboat diplomacy lies the threat of embargo and war.

To the ire of the US, there has been a stampede of countries, including Britain and other European imperialist powers, to get in on the ground floor of the Asian Infrastructure Investment Bank (AIIB) that China initiated a year ago. Washington was further chagrined when, in late October, Tory prime minister David Cameron hosted a state visit by Chinese president Xi Jinping that was full of pomp, pageantry and business deals. George Osborne vowed to make Britain “China’s best partner in the west”. China agreed to sell nearly £5 billion in yuan-denominated bonds on the London market, the first such sale beyond the Chinese mainland. China also agreed to invest billions more in the construction of two nuclear reactors in Britain, prompting howls that Cameron was endangering Britain's “national security”.

Notwithstanding such squabbles, the US and Britain — as well as Japan and other imperialist powers — all share the strategic goal of destroying the Chinese deformed workers state. Contrary to the claims of most bourgeois pundits and self-described socialists, China is not a capitalist country. The 1949 Revolution overthrew the rule of the Chinese bourgeoisie and landlords and liberated the country from imperialist bondage. The subsequent creation of a collectivised, planned economy laid the basis for a surge in industrial development and enormous gains for the miserably poor worker and peasant masses. The revolution, which was carried out by Mao Zedong’s peasant-based People’s Liberation Army, created a workers state, but one that was deformed from its inception by the rule of the parasitic Chinese Communist Party (CCP) bureaucracy. Despite major capitalist inroads, China remains a workers state with the core of its economy collectivised, including nationalised banks and major industries. Although a small capitalist class has emerged on the mainland, it does not hold state power.

From Mao’s time to today, CCP policies have expressed the nationalist Stalinist dogma that socialism — a society of material abundance marked by the disappearance of classes — can be built in a single country, even one as backward as China. This programme is utterly counterposed to the Marxist programme of world proletarian revolution — the prerequisite to creating an internationally planned economy that would eliminate scarcity by harnessing the most sophisticated technology, which today is concentrated in the advanced capitalist countries. Under Mao, the planned economy was immensely distorted by the rule of the bureaucracy, which made a virtue of economic autarky. To correct the imbalances this bureaucratic mismanagement created and to spur modernisation and growth, beginning some 35 years ago subsequent regimes introduced market reforms, loosening state control over production and trade. Capitalist investment was also invited into certain areas. Absent the discipline of soviet democracy (workers councils), there is an inherent tendency to replace centralised planning and management with market mechanisms. (For more on this, see “China’s ‘Market Reforms’: A Trotskyist Analysis”, Workers Vanguard nos 874 and 875, 4 August and 1 September 2006.)

The International Communist League stands for unconditional military defence of China against the imperialists and other capitalist states and against internal counterrevolution. At the same time, we give no political support to the CCP regime, which must be swept away by the Chinese proletariat through a political revolution that creates a regime of workers democracy committed to a programme of world socialist revolution.

The following article, adapted from Workers Vanguard no 1076, 16 October 2015, is an edited presentation by Bruce André of the Workers Vanguard Editorial Board to a Spartacist League/US meeting in New York City in September. Comrade André’s talk debunks some of the more pervasive myths being circulated in the press about the Chinese economy and explains some recent economic developments.

* * *

This has been a volatile summer for financial markets, resulting in some sharp losses, especially for banks, hedge funds and other big capitalist investors. That, in turn, has generated a renewed round in the bourgeois press of seeking to explain the problems of the world economy as resulting from a supposedly mounting crisis in China.

On 24 August, following a series of sharp declines on the New York Stock Exchange, the Dow Jones Industrial Average plummeted almost 600 points. As it happened, this came after a series of major sell-offs on the Shanghai stock exchange. The financial press in this country started screaming about a supposed “meltdown” in China. The Taaffeites of the Committee for a Workers’ International, who claim that capitalism has been restored in China, fretted about “a China-led global recession” (“China crisis triggers panic on global markets”,, 25 August 2015).

Now, first of all, the sell-off on Wall Street had, at bottom, nothing to do with China. It was a classic example of a financial bubble deflating (somewhat). Starting in 2009 and running until a year ago, the Federal Reserve printed money to the tune of some $3.5 trillion and gave it out free of charge to the banks and other financial institutions. They, in turn, invested in stocks and other risky assets in the US and around the world, artificially stimulating the global economy. A lot of those financial bubbles — from the prices of minerals and other raw materials to stock and bond prices in Third World countries — are now losing steam. The fact that the pinprick that let some air out of the stock market bubble in the US came from a fall in the Shanghai stock market was purely accidental, with no underlying economic significance. The pinprick could just as easily have come from rumours about Fed policy, or almost anything else.

Secondly, the state of the Shanghai stock market says nothing about the state of the Chinese economy as a whole. Unlike stock markets in the US and other capitalist powers, movements on the Chinese stock market have almost no impact on investment decisions in that country. Only about five per cent of private-sector funding in China is generated on the stock market — to say nothing of the dominant state-owned sector! If the NY Stock Exchange lost some 40 per cent of its value in two months, as the Chinese stock market did this summer, we would be looking at a global depression.

The collapse of the Shanghai exchange surely represented a political black eye for the Beijing regime, which for the past couple of years has been encouraging the country’s middle class to boost their income by investing in stocks while preaching that the stock market was going to play a “decisive role” in allocating resources. That political commitment by the Beijing bureaucrats no doubt explains why they have spent an incredible $236 billion of the country’s valuable reserves trying to shore up stock prices since the rout began in June.

Thirdly, even if the Shanghai stock market collapse reflected a growing economic crisis in China, which it did not, that would hardly portend an economic crisis in the US. The US has a huge domestic market that accounts for some 70 per cent of its Gross Domestic Product. The Chinese market for US exports accounts for only one per cent of this country’s GDP.

The yuan and you

Meanwhile, in mid August Beijing devalued the yuan, allowing the value of its currency to fall 4.4 per cent in one week. This was viewed in the US financial press as another sign that the Chinese economy is supposedly entering into a deep crisis. The devaluation was presented as a panicked reaction by Beijing, seeking to head off an economic downturn by boosting exports. (A lower exchange rate for the yuan makes Chinese exports cheaper on international markets.) In a Monthly Review (27 August 2015) article titled “The Devaluation of the Yuan”, Indian economist Prabhat Patnaik proclaimed: “China’s devaluation of the currency portends a serious accentuation of the world capitalist crisis.” Patnaik foresees a coming currency war in which China desperately tries to stay afloat by increasing its exports at the expense of its competitors internationally.

Let’s put this currency devaluation in context. Back in 2005, under strong pressure from Washington, China basically tied its exchange rate to the dollar. That resulted in an upward revaluation of the yuan that continued over the next ten years, which was almost certainly not exactly what Chinese officials had anticipated. As the US Federal Reserve, following the financial crisis, began printing money like there was no tomorrow, that logically should have led to a weakened dollar. But the economic stagnation in Japan and Europe, to say nothing of the ongoing Greek debt crisis, ended up making the dollar look like the world’s safe haven for finance capitalists. Capital flowed into the US, strengthening the dollar — as well as the yuan, which was now linked to the dollar. The upward valuation cut into China’s exports because it made it more expensive to purchase goods made in China and priced in yuan. This was especially true for importers in Europe and Japan, since the euro and yen were weakening.

The best way to judge the economic impact on China is to look at the yuan’s trade-weighted exchange rate over the past decade. This is the exchange rate of the yuan not only against the dollar but against a basket of the currencies of China’s main trading partners, weighted to reflect the importance of each of those countries in China’s trade. A 15 August 2015 Economist article included a graph showing that from 2005 to mid 2015, the yuan’s trade-weighted exchange rate increased by fully 50 per cent. In other words, if you just look at the impact of the appreciation of the yuan over that period, it would tend on average to make Chinese goods 50 per cent more expensive on international markets.

In that context, the depreciation of the yuan in August was anything but earth-shattering. In fact, the Economist questions whether it is even accurate to speak of a devaluation. It points out that the People’s Bank of China (the central bank) first stood aside, letting the market play more of a role in setting the yuan’s exchange rate; then it quickly backtracked, spending tens of billions of dollars of the country’s reserves to prop up the yuan and keep it from falling further. As the Economist put it: “The initial 2% devaluation only undid the previous ten days’ worth of appreciation in trade-weighted terms. The yuan remains more than 10% stronger against the currencies of China’s trading partners than it was a year ago.”

One constraint on the People’s Bank of China is that a bigger one-off devaluation would simply cause other countries to follow suit, undoing the effect of the devaluation in terms of boosting exports. And a widespread perception that the yuan is headed towards a series of devaluations would accelerate the already bothersome flight of capital out of the country.

All of this is not to say that the yuan depreciation, such as it is, will have no impact on global trade. As of mid 2015, Chinese exports were down 8.3 per cent over the previous twelve months, clearly due to the economic slowdown in much of the capitalist world. The yuan revaluation can be expected to provide a bit of a boost to Chinese exports. Meanwhile, a number of Asian countries with strong export exposure to China will be hurt to some degree — Taiwan, Malaysia and South Korea export more than five per cent of their GDP to China.

In Europe, the yuan devaluation drove down the stock price of a number of companies that sell in China as investors worried about possible losses. But as the dust cleared it was not at all obvious that, overall, European companies would suffer much pain. China is the largest market for major German car manufacturers, but it turns out that those companies are largely hedged against currency fluctuations. And a significant number of the cars that they sell in China are made there, which mitigates the impact of currency-rate changes. The Wall Street Journal (11 August 2015) favourably quoted a prominent stock analyst who declared that the overall impact of the devaluation on the German auto industry would “effectively be zero”.

What crisis?

That said, the widespread claim that Beijing devalued the yuan in order to head off a burgeoning crisis in China manifestly has no basis in fact. In the words of economist Nicholas Lardy in a New York Times op-ed piece (26 August 2015), the talk of crisis in China is a “false alarm”. Virtually everyone agrees that China’s economy is growing at something like seven per cent per year, a level that no advanced capitalist country today could even hope to attain. True, China’s phenomenal rate of growth is down somewhat from the rates of recent years (9.7 per cent in 2013 and 8.3 per cent in 2014). But keep in mind that those figures express China’s growth in year-over-year percentage terms. From 2007 to 2013, China tripled its output of goods and services. Last year China accounted for almost 40 per cent of all economic growth worldwide. In other words, seven per cent growth this year represents a much higher total output than 14 per cent growth did in 2007.

Furthermore, the slip in percentage growth is hardly surprising. Staggering rates of state-driven investment kept the Chinese economy booming while the capitalist world was reeling from the global financial crisis of 2008-09. That gigantic investment in housing, transportation and other fixed assets appears to have topped out at a rate equivalent to one half of the country’s GDP — an extraordinary level of investment. In just two years, from 2011 to 2012, China constructed some 3.8 billion square metres of housing, enough to comfortably house well over 100 million people. (The Taaffeites side with neoliberal economists, well to the right of Keynesians like Paul Krugman, by attacking Beijing for deficit spending. Their 25 August 2015 article does not address the most obvious question: How was “capitalist” China uniquely able to make enormous strides during the global financial crisis?)

One could add that the devaluation of the yuan comes as Beijing is setting up the Asian Infrastructure Investment Bank and has committed hundreds of billions of dollars to building the new Silk Road Economic Belt through Central Asia to Europe and maritime routes through South Asia to Africa. All of this, along with the burgeoning Chinese investment in Africa and South America, speaks to an extension of China’s economic and financial footprint globally, not to economic crisis in China.

Those pushing the notion of an impending economic crisis in China point to the obvious bubbles that have developed, such as in real estate. With the government holding well over $3 trillion in reserves, there is little likelihood of the national banking system facing collapse. Recent articles have reported that state stimulus programmes have resulted in excess industrial capacity, for example in cement manufacturing. A planned economy under the rule of workers and peasants councils would minimise such imbalances. In the event of unused capacity, workers in nationalised industries could be retrained and employed in other industries. Obviously, private businesses cannot and will not do this.

Some prospects and questions

So, what can we say about the state of the Chinese economy? Behind the economic statistics, what we are focused on is the potential for working-class revolt and political fracturing of the Communist Party regime.

The first question is: As China’s explosive economic growth slows down somewhat, will there be enough jobs to prevent mass unemployment? Let’s first look at the current distribution of China’s labour force among the main sectors of the economy. There has been a sharp decline in the proportion of the labour force engaged in agriculture, from about 47 per cent in 2004 to under 30 per cent a decade later. That decrease was accompanied by an increase in the proportion of the industrial workforce until about 2011, when it levelled off at about 30 per cent. Meanwhile, there has been a steady increase in the proportion of workers engaged in the service sector, from about 30 per cent in 2004 to over 40 per cent in 2014.

An important fact about these service-sector jobs is that, for the most part, they are presumably not highly productive. Assuming that the service sector continues to expand, one can imagine that it would be an efficient mechanism for absorbing labour leaving the agricultural sector while keeping a damper on unemployment. The precondition is that the personal income of Chinese consumers must be high enough to support an expanding service sector. That seems to be the direction that things have been going in. Personal consumption appears to be on track to replace fixed-asset investment as the country’s main engine of economic growth. Last year, personal consumption accounted for 51 per cent of GDP, up from 48 per cent in 2013. Sales of cars and household appliances, as well as overall retail sales, increased. In the first half of this year, personal consumption accounted for 60 per cent of the country’s economic growth.

More than one third of China’s labour force consists of migrant workers from rural regions, presumably the lowest-paid section of the industrial workforce. During the 1980s and ’90s, the real wages of Chinese workers hardly increased, despite huge gains in productivity — the simple transfer of a labourer from a backward rural farm to an urban factory represents an enormous increase in productivity. After 2009, the wages of migrant workers increased dramatically — almost doubling in five years. Those increased labour costs were a major factor in undercutting China’s export-led growth.

The question that, to my mind, is posed by all of this is: What happens when the pool of migrant labour begins to dry up? From what I can tell, that day is not necessarily very far off. The country’s population aged 15 to 24 decreased from about 250 million in 1990 to about 200 million in 2015. This was caused in part by the regime’s one-child policy, which was recently scrapped. Last year, China had 14.5 million fewer migrant workers aged 16 to 20 than in 2008, a decline of 60 per cent.

China’s working-age population, aged between 16 and 60, currently stands at about 916 million. That number has been falling for the past three years, at an increasing rate. In February of this year, the total number of migrant workers leaving their rural homes for jobs in the cities fell 3.6 per cent year-on-year. It was the first recorded drop in the flow of migrant workers. For the moment, the decline in the number of young migrant workers has been offset by increased employment of older workers. From 2008 to 2014, the portion of migrant workers aged over 50 increased from 11.4 per cent to 17.1 per cent. Some 14.6 per cent more migrant workers were over 50 years of age last year compared to 2013, the biggest increase in three years.

As the flow of migrant workers from rural areas starts to slacken seriously, economic development is going to depend much more heavily on increasing productivity. As in the case of improving the quality of industrial goods, the bureaucracy is, by its nature, ill prepared to tackle improvements in efficiency and innovation. This point was explained by Leon Trotsky in relation to the Soviet Union in The Revolution Betrayed (1936).


Workers Hammer No. 233

WH 233

Winter 2015-2016


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