{"id":927,"date":"2013-07-16T11:40:40","date_gmt":"2013-07-11T08:28:39","guid":{"rendered":"http:\/\/shehuizhuyizhe.com\/?p=927"},"modified":"2013-08-23T07:46:49","modified_gmt":"2013-08-23T07:46:49","slug":"china-li-keqiang-prepares-economic-shock-therapy","status":"publish","type":"post","link":"https:\/\/chinaworker.info\/en\/2013\/07\/16\/927\/","title":{"rendered":"China: Li Keqiang prepares economic \u2018shock therapy\u2019"},"content":{"rendered":"

Capitalists commentators applaud \u2018Liconomics\u2019 but its effects on the global economy can be disastrous<\/strong><\/p>\n

chinaworker.info<\/p>\n

\u201cChina has basically said goodbye to 8 percent GDP growth,\u201d declared Ha Jiming, a spokesman for Goldman Sachs in China, recently. The bank\u2019s June research report went on to predict \u201caverage annual growth rate in the next seven years to 2020 perhaps falling to the vicinity of 6 percent\u201d. While this economic growth rate remains impressive (if official figures are to be believed) by comparison with the sickly performance of most advanced capitalist economies, China\u2019s economy has left the fast lane. Even if growth of seven-plus percent holds in coming years \u2013 which many are now questioning \u2013 the Chinese economy has already entered a serious crisis. Soaring debt levels and an uncontrolled \u2018shadow banking\u2019 credit surge are cancelling out the central government\u2019s efforts to steer economic policy. Unprecedented levels of industrial overcapacity and over-construction point to a painful economic \u2018correction\u2019 and possible \u2018hard landing\u2019 in the coming period. This is the background to the\u00a0\u201cpainful economic restructuring\u201d Premier Li Keqiang is promising.<\/p>\n

Alongside this, the CCP (Chinese Communist Party) regime itself has arrived at a turning point. Important shifts are underway as party leader Xi Jinping attempts to consolidate his rule, in part departing from the previous \u2018collective leadership\u2019 model and trying to impose a more \u2018Bonapartist\u2019 personal dictatorship as he grapples with acute internal contradictions and a growing legitimacy crisis.
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\u201cFrankenstein economy\u201d<\/strong><\/p>\n

Many commentators say China\u2019s economy is turning into a Frankenstein monster: \u201cIt\u2019s a giant and powerful creature born of unorthodox experiments, and its makers are increasingly losing control,\u201d said Bloomberg. One could say the same about the US and European economies, and the new leaders\u2019 pro-capitalist policies do not offer a solution. But the explosion of debt throughout the Chinese economy since the onset of the global capitalist crisis, starting with the regime\u2019s 2008 stimulus package, is unprecedented for any large economy. Overall credit jumped from US$9 trillion to US$23 trillion in 2008-12. \u201cThey have replicated the entire US commercial banking system in five years,\u201d says Fitch\u2019s senior director in Beijing, Charlene Chu.<\/p>\n<\/div>\n

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An increasing number of commentators compare the signs of financial stress in China today to the situation in the US just prior to its banking meltdown. \u201cWe believe that the domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad. The problems of China\u2019s lenders are greater than those of Western banks on the eve of the financial crisis,\u201d warned Carson Block, of Muddy Waters Research, a company which has exposed several accounting scandals in Chinese companies.<\/p>\n

The growth of shadow banking in China, which accounted for 50 percent of new credit last year, is of particular concern. Not only does its sheer scale present daunting problems for Xi and the new CCP leadership, just seven months into their term, but the fact that most shadow banking actually occurs through \u2018moonlighting\u2019 on the part of the mainstream banks, shows the Chinese dictatorship has lost control over its banking system. This reflects a growing \u2018financialisation\u2019 of the economy with new credit increasingly ploughed into speculation or recycling old loans rather than into productive investment.<\/p>\n

The rationale for this was explained by the deputy general manager of a state-owned steelmaker, who spoke anonymously to Reuters: \u201cCan we use the money to expand production? Definitely not. We will lose more if we produce more. We can only rely on other channels.\u201d His steel firm was losing an average 100-200 yuan per tonne of steel sold, he explained, and had therefore turned to lending money through \u2018entrusted loans\u2019, one of the many categories of shadow financing. There are many other instances of non-financial state-owned enterprises (SOEs) engaging in shadow banking.<\/p>\n

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Lowest growth for 23 years?<\/strong><\/p>\n

Last year\u2019s GDP growth of 7.7 percent was the lowest for 13 years. 2013 could see the slowest growth for 23 years, if as many now think, the government misses its GDP target of 7.5 percent. At a recent meeting of provincial government heads, Xi said, \u201cWe should no longer call someone a hero simply based on the GDP growth rate,\u201d signalling his administration\u2019s emphasis on curbing runaway credit and massive, increasingly wasteful investments. Changing direction will be no easy task, however, given the risks of burst financial bubbles, a banking crisis, or of a credit-squeeze-induced hard landing.<\/p>\n<\/div>\n

The credit crunch in June, which shook global financial markets, was a warning. The central bank and Premier Li attempted to assert control over the state-owned banking system and its mass production of new shadow banking financial instruments \u2013 similar to the derivatives that brought down the US banking system. But this attempt to disarm the debt bomb had the opposite effect, causing a 67 percent surge in new shadow banking lending (June year-on-year) as mainstream banks scrambled to raise new funds. This forced Li and the central bank to retreat from their initial hardline stand and inject more liquidity into money markets.China has seen history\u2019s biggest ever housing bubble, much of it lying vacant. Currently 60 percent of the world\u2019s urban construction is in China, but for every apartment built for lower or middle-income buyers, ten luxury apartments are built (see chart). It goes without saying that this does not reflect the country\u2019s economic demographics. According to government data, housing prices quadrupled from 2007-11. A recent IMF report says seven out of 10 of the world\u2019s least affordable housing markets (Beijing, Shanghai, Shenzhen, Hong Kong, Tianjin, Guangzhou and Chongqing) are now in China. This building craze has saddled local governments and state-owned companies with massive debts. The official Xinhua News Agency reported on 5 July that district governments in the coal boom city of Ordos, Inner Mongolia, are forced to borrow to pay their employees\u2019\u00a0salaries. The report says Ordos local government entities have built up 240 billion yuan ($39 billion) of debt, while the city had 37.5 billion yuan ($6.1 billion) of revenue last year. Ordos is not exceptional, merely a symptom of a much wider problem.<\/div>\n
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Kangbashi New Area in the city of Ordos is a ghost city built for 1 million residents<\/figcaption><\/figure>\n

Vice Minister of Finance Zhu Guangyao has admitted the central government does not know how much debt local governments have amassed, warning previously published estimates are too low. A 2010 government report put local government debt at 10.7 trillion yuan, around 25 percent of GDP at that time. Yet according to Xiang Huaicheng, a former finance minister, this debt is now likely to exceed 20 trillion yuan (US$3.3 trillion). But there has been no publication of complete data since 2010, with the government evidently fearing a true picture would demolish the fa\u00e7ade built up by China\u2019s banks \u2013 now among the world\u2019s biggest \u2013 of supposedly healthy balance sheets and extremely low non-performing loan ratios.<\/p>\n

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From \u2018gradualism\u2019 to \u2018shock therapy\u2019?<\/strong><\/p>\n<\/div>\n

Premier Li Keqiang\u2019s economic agenda, nicknamed \u2018Liconomics\u2019, amounts to \u2018painful\u2019 restructuring of the banks and state-owned sector in order to achieve sustainable i.e. slower GDP growth, by weaning the economy away from unprecedented amounts of debt, towards more consumption and private investment. \u201cIt is a self-imposed revolution that will require real sacrifice, and it will be painful,\u201d he told the world\u2019s press in his first appearance as premier last March. This is a theme the state-run media have repeated ad nauseum. At the time of June\u2019s credit squeeze, Xinhua News Agency commented, \u201cFor the blessing of a more sustainable economy, banks are the first, but certainly not the last to suffer the hardship.\u201d<\/p>\n

Li\u2019s economic team is dominated by former lieutenants of Zhu Rongji, hailed by capitalists internationally as the most \u2018reform-minded\u2019 of China\u2019s premiers, whose \u2018merits\u2019 include destroying 60 million SOE jobs. Former Zhu acolytes seconded to Li\u2019s team include Vice Premier Ma Kai, Finance Minister Lou Jiwei and central bank governor Zhou Xiaochuan. Ma and Zhou are princelings.<\/p>\n

Li\u2019s policies, if fully implemented, amount to a form of deflationary \u2018shock therapy\u2019 to shake-up an economy that \u2013 run on a capitalist \u2018market\u2019 praxis \u2013 is fast running out of other options. This \u2018shock therapy\u2019 is not motivated by ideology \u2013 the new CCP bosses are \u2018pragmatists\u2019 \u2013 and it aims to target key state-dominated sectors especially the financial sector, rather than apply wholesale across the economy. Its aim is to break the current addiction of state-owned entities to credit, and the concomitant build-up of idle capacity, by subjecting these sectors to greater \u2018market forces\u2019 through private investments. But this is a high-risk approach, which is already facing major problems. One immediate effect of \u2018Liconomics\u2019 is likely to be a further credit drought as real lending costs (in defiance of official rates) head upwards, something that could turn the government\u2019s hopes of a \u2018controlled\u2019 slowdown into a full-blown recession, or worse, if a shortage of credit triggers the bursting of China\u2019s multiple asset bubbles. In such a situation the government\u2019s refusal to inject new stimulus could be put to an early test.<\/p>\n<\/div>\n

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Capitalist commentators (who have learnt nothing from the global crisis) applaud the new CCP leadership\u2019s \u2018bold\u2019 beginnings, seeing this as the only way to shift China onto a sustainable growth trajectory. But as the saying goes one should be careful what one wishes for. The effects of Li\u2019s planned reforms on global GDP will mostly be negative. China has been the main motor behind the last decade\u2019s \u2018commodities supercycle\u2019 of record energy and mineral prices (boosting growth particularly in Africa and Latin America). China is also the number one trading partner of 124 countries, knocking the US into second place with a score of 76 countries. A much slower pace of Chinese growth will be felt throughout the global economy, amplifying the problems of capitalism on a world scale. \u201cIs the world ready for Beijing\u2019s economic new normal?\u201d wondered economist Stephen Roach, a keen supporter of \u2018Liconomics\u2019.<\/p>\n

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Princelings are a majority in the new politburo standing committee<\/figcaption><\/figure>\n<\/div>\n

Princelings and the CCP<\/strong><\/p>\n

The 18th Congress (last November) produced the closest thing to a \u2018power shift\u2019 at the top of the one-party dictatorship. The CCP is sometimes called \u2018one party, two coalitions\u2019 \u2013 referring to the elite princeling faction (taizidang<\/em>) and the plebeian Youth League faction (tuanpai<\/em>). The princelings, from billionaire \u2018red\u2019 families, captured a majority of top posts within the dictatorship for the first time. This signalled a number of things, borne out of a fear of the future and a rejection of political change. By embracing a neo-dynastic succession, the ruling elite hopes to protect their fabulous riches \u2013 derived from plundering state resources \u2013 by ensuring the continuation of one-party dictatorship. Xi\u2019s family wealth is estimated at US$376 million; three times the wealth of the entire British government (with 17 millionaires). Other top princelings have amassed even more impressive fortunes. Like the corrupt cliques of ousted Middle Eastern dictators, the princelings know they are finished if the one-party dictatorship goes down. Their mission is to save it at all costs.<\/p>\n

Xi is a top princeling, but rather than a mere tool of the princeling faction he is trying to build his own power base, balancing between the factions and striking deals with one then the other. This balancing act also seeks to contain entrenched factional rivalries that could threaten an open split. Outwardly, Xi\u2019s manoeuvrings reinforce the regime\u2019s schizophrenic features, whereby one policy appears to contradict another. Increased nationalism, and muscular interventions over disputed territories at sea, are apparently negated by conciliatory gestures from Beijing to the US and South East Asian countries (but not so far to Japan) to seek a \u2018common\u2019 solution. While rapidly upgrading its military, boosting its role in Africa (sending combat troops to Mali, its fourth African UN intervention), and Latin America, the CCP wants to avoid a direct conflict with the US \u2013 as shown by its stand over ex-NSA man Edward Snowden.<\/p>\n

Xi\u2019s \u2018Maoist turn\u2019 is the most glaring of these contradictory policies: peppering speeches with Mao quotes and borrowing to some extent from the style of the jailed Bo Xilai. There is nothing radical or remotely anti-capitalist in this. Mao\u2019s spectre is being used to crackdown on dissent \u2013 including within the state apparatus \u2013 and especially to suppress calls for democratisation (so-called political reform) and its latest incarnation in the debate over\u00a0\u2018constitutionalism\u2019. Like Deng Xiaoping, Xi has learned to \u2018signal left and turn right\u2019. He and Premier Li plan to launch a major package of pro-capitalist economic \u2018restructuring\u2019 at the autumn Central Committee plenum, likely to include financial sector deregulation, opening up of some state monopoly sectors, and privatisation, perhaps sugared with populist measures such as a reform the apartheid-like \u2018hukou<\/em>\u2019 residential pass system (but if so, limited and gradual in scope), and a possible partial relaxation of the one-child policy.<\/p>\n

No \u2018democratisation\u2019<\/strong><\/p>\n

The Xi-Li leadership seeks to bolster authoritarian rule and at the same time win back public support\u00a0with a selective and largely symbolic crackdown on corruption and \u201chedonism\u201d\u00a0alongside increased nationalist rhetoric. But it rejects political reform fearing that even limited democratisation risks a political meltdown, emboldening mass challenges and collapsing the \u2018self-discipline\u2019 of the CCP-state over its antagonistic components. Events in Turkey, Brazil and Egypt will have reinforced Xi\u2019s resolve against political reform. The ousting of Mursi in Egypt prompted a stream of articles in the regime-controlled media, such as People\u2019s Daily and Global Times, stressing social stability and warning against \u201cWestern-style \u2018one man, one vote\u2019 democracy.\u201d<\/p>\n

\u201cA lesson provided by Egypt to the Chinese leadership is that they have to fully grab power,\u201d said political commentator Zhang Lifan. \u201cThe economy is facing a downturn now and Beijing leaders will find it more urgent to maintain stability. Any loss of power may make them collapse.\u201d This is nothing new, it merely reinforces the outlook of the Xi-Li leadership. Xi is \u201cobsessed with the Gorbachev phenomenon and doesn\u2019t want to be remembered in history as the Gorbachev of China,\u201d says China watcher, Roderick MacFarquhar.<\/p>\n

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Owner Chip Starnes held hostage by laid-off workers at Specialty Medical Supplies in Beijing<\/figcaption><\/figure>\n

Mass struggle: a learning curve<\/strong><\/p>\n<\/div>\n

There are a continuing high number of mass struggles, but these remain decentralised. There were 180,000 land-related protests in 2012, alongside countless strikes. In Wukan, where a landmark struggle broke out in 2011, the rebels-turned-village-leaders have become split and increasingly criticised for failing the movement\u2019s demands for the return of stolen land. Wukan is unquestionably a very important struggle, because of the degree of democratic self-organisation acheived by the villagers during their mass struggle, which unfortunately they agreed to dissolve in return for a December 2011 deal with provincial CCP leaders. The idea that this signalled a new \u2018reformist\u2019 approach to conflicts on the part of the dictatorship has been shown to be false, with increasing repression alongside largely empty concessions that \u201cbounce like a fake cheque\u201d as has happened in Wukan. This harsh experience is nevertheless educating a layer of land activists and others to distrust all levels of the CCP.<\/p>\n

100 Beijing workers at a medical supply factory made world news when they took a US capitalist hostage in June over unpaid severance payments. This tactic is becoming increasingly common as shown by a similar action in Huizhou, southern China, with five Chinese managers (of Shanghai Zhongji Pile Industry) detained for five days over non-payment of wage arrears.<\/p>\n

Reflecting the downturn in the economy, a wave of outsourcing, company closures and relocations (including to even lower-wage economies such as Bangladesh and Cambodia), most strikes are defensive \u2013 to press for unpaid wages, bonuses or compensation tied to closures and relocation. Figures from the Ministry of Human Resources and Social Security for 2012 show 6.2 million workers filed complaints to the authorities related to 20 billion yuan (US$3.2 billion) in unpaid wages. This may just be the tip of the iceberg.<\/p>\n

Workers face major new challenges as the economy slows. The new government is making no secret it plans to inflict \u2018painful\u2019 policies. While Xi and Li will try to sugar this pill with some populist promises to expand welfare provision (we\u2019ve heard this before) and reform the\u00a0hukou<\/em>system (ditto), the regime has no alternative from its class standpoint but to launch a fresh wave of attacks on the working class and the poor to pay for the speculative binge of the CCP authorities and their capitalist cohorts. Highly indebeted local governments, which account for over 80 percent of all government spending, are hardly in a position to finance an expansion of welfare or the inclusion of migrant workers (hukou<\/em>\u00a0reform). As on so many other occasions, local governments will do their utmost to evade and ignore new social spending commitments imposed from Beijing.<\/p>\n

These contradictions are preparing the way for explosive mass resistance in the coming period. New internal crises and economic shocks can cause paralysis within the regime and create openings the working class can exploit to win concessions and organise itself. The building of workers\u2019 organisations, initially underground, and a genuine socialist party is vital to organise the struggle against capitalist crisis and dictatorial rule.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Capitalists commentators applaud \u2018Liconomics\u2019 but its effects on the global economy can be disastrous chinaworker.info \u201cChina has basically said goodbye to 8 percent GDP growth,\u201d declared Ha Jiming, a spokesman for Goldman Sachs in China, recently. The bank\u2019s June research report went on to predict \u201caverage annual growth rate in the next seven years to […]<\/p>\n","protected":false},"author":12,"featured_media":933,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"tdm_status":"","tdm_grid_status":"","footnotes":""},"categories":[132,124],"tags":[174,175],"class_list":{"0":"post-927","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-china","8":"category-news","9":"tag-china-2","10":"tag-li-keqiang"},"yoast_head":"\nChina: Li Keqiang prepares economic \u2018shock therapy\u2019 - China Worker<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/chinaworker.info\/en\/2013\/07\/16\/927\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"China: Li Keqiang prepares economic \u2018shock therapy\u2019 - China Worker\" \/>\n<meta property=\"og:description\" content=\"Capitalists commentators applaud \u2018Liconomics\u2019 but its effects on the global economy can be disastrous chinaworker.info \u201cChina has basically said goodbye to 8 percent GDP growth,\u201d declared Ha Jiming, a spokesman for Goldman Sachs in China, recently. 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