by Theo Russell
In November 2008 the Chinese government announced a two-year economic stimulus package of 4 trillion yuan ($586 billion or £382 billion) to counteract the effects of the biggest global recession in 80 years.
Unlike similar efforts in Europe and the United States, China’s stimulus proved to be a spectacular success, and the recession hardly affected China at all. GDP growth was maintained at 10% per year in 2007-2009, generating over one trillion dollars, despite the fact that exports, the engine of China’s economic success for the last three decades, fell by over $120 billion as Western demand slumped.
Following the 2007 credit crunch many Western economists warned of threats to China’s economic stability, including property price bubbles, rising inflation and a fragile banking system. As yet none of these threats have materialised apart from inflation, which the government has already acted to bring down.
Some economists even predicted that the United States would be the first major economy to come out of recession, and China one of the last. The reality has been the exact opposite: China’s recession was brief and shallow, while these predictions turned out to be wildly optimistic about the US economy. So much for our highly-paid Western economists!
The US economy has spectacularly failed to take off, in spite of a $787 billion stimulus package in 2009, and a staggering $1.6 trillion spent on quantitative easing in 2009 and 2010. By the 3rd quarter of 2010, US GDP was 0.8% below its peak in the 4th quarter of 2007. This month’s figures show that US unemployment is still stuck at 9.4 percent.
Our experience in Britain has been similar to that of the US. The government spent or loaned £550bn in bank bail-outs, and £200bn in quantitative easing in 2008/09. Britain’s bank bailout equaled 19.8% of GDP, a higher proportion than in any other country, reflecting the huge influence of the financial sector.
The UK’s GDP growth collapsed from an annual rate of about three percent in early 2007 to minus five percent in the spring of 2009. It has gradually returned to 2.8%, but unemployment is still close to 3 million or 8%, mortgage lending is at its lowest level since 2000 and has fallen 10 per cent in the past year,
and repossessions are rising and are expected to continue rising in 2011.
So what explains the success of China’s economic stimulus in comparison to the leading capitalist countries? The answer apparently lies in the structure of the Chinese economy and the Communist Party of China’s so-called “market socialist” economic model.
Research by Professor John Ross, visiting Professor at Shanghai’s Jiao Tong University and editor of the internet blog Key Trends in Globalisation, has identified that the key factor in the success of China’s policies as the level of private fixed investment.
In the US, the GDP fell by $103bn during the recession – or “Great Recession” as Ross calls it - yet exports actually grew by $46bn and private inventories by $103bn, while personal consumption only fell by $8bn.
The single factor which wiped out all the other growth factors was the $409bn collapse in US private fixed investment (residential and non-residential).“In short, the fall in fixed investment accounted for the entire decline in US GDP. Indeed, the fall in US fixed investment was four times the total drop in US GDP,” says Ross.
In China during the same period exports fell by 0.8 trillion yuan, inventories increased only slightly (0.1 trillion yuan), and personal consumption grew by 2.6 trillion yuan. But fixed investment leapt by a massive 5.3 trillion yuan, equivalent to 67% of the increase in GDP, and this counteracted the effects of the recession. This was the exact opposite of the US experience and as Ross says “China’s avoidance of recession, and its rapid economic growth, was driven by the rise in fixed investment.”
The steep increase in fixed investment in China was possible because the stimulus programme combined investment by state-owned banks, with government directives to private banks to invest in the domestic economy. China’s financial sector was directed by the state to invest in new technologies such as water treatment, AIDS prevention, computer chips, wireless technology and energy extraction.
In Britain, a hallmark of our post-credit crunch experience has been the collapse in lending. The British banks have falsely claimed that this has been caused by a collapse in demand for loans. But this is flatly contradicted by the Bank of England, which said in a report in December that the real reason for the lending collapse is that the banks had “reduced the supply” of loans.
In other words, the banks have imposed a squeeze on credit, in the midst of the biggest economic recession since 1929. Taken together with the biggest government spending cuts since 1945, it’s hard to see what the growth being predicted by David Cameron in 2011 will be based on.
Since the bank bail-out both the Labour and coalition governments have endlessly debated the possibility of imposing lending targets on the banks. In response, the banks offered to set up a "Big Society Bank", codenamed “Project Merlin,” with a £1.5 billion fund for small businesses.
But by December 2010, when coalition ministers met the bank chiefs, the banks had backtracked. Now they were offering to lend £200 million to UK businesses, of which a paltry £70 million would be for small businesses.
It’s a similar story with bonuses and the “banking levy”. In October the coalition introduced a £2.5bn a year levy on bank profit sheets, but in 2010 alone bank bonuses are expected to be £7bn. It is now clear, after months of promises, that no action is going to be taken on bonuses.
British bank profits have actually gone up since 2007, according to the Bank of England, as if the recession had never happened! They reached £15.5bn in the first six months of 2010 alone and will probably hit £30-35 billion for the whole year, so a £2.5bn levy is just small change for the banks.
They’re not short of funds either. The UK financial sector owns foreign assets worth almost 600 percent of the country’s GDP. But they want to hang on to every penny, so they can carry on business as usual exploiting workers in Britain and the world over.
So in China while the government’s stimulus funds are being transferred into productive capital in domestic enterprises, in Britain and the US the banks are taking vast amounts of government cash and not passing them on to the real economy. They claim this is because their finances are in a fragile state, due to the “credit crunch” which they themselves created.
In November the US Federal Reserve announced a further $600 billion injection of quantitative easing into the US economy, but according to Professor Ross this is unlikely to have the same effect as China's stimulus, as long as US private fixed investment does not return to growth. With Republican control of the House of Representatives, and the growth of “anti-statist ideology”, the rise of the Tea Party and the Republican Right, Ross says an investment programme able to generate real growth is politically impossible.
This is perfectly normal: capitalists will only invest in the domestic economy when it is growing and profitable to do so. The capitalist class will only resort to Keynesian social investment when faced with the threat of revolution, and that is clearly not the case now.
Ross predicts that “the US economy will therefore continue to be strongly outperformed by China's”, adding: “It is therefore clear why Hu Jintao stated that China’s high performance in the financial crisis was due to the superiority of its economic structure.”
The success of China’s economic stimulus and its development model are of practical and theoretical importance for Marxists, adding new pages to the historical experience of building socialism and the application of Marxist economic theory.
In an article in the London Guardian, Professor Ross stresses that China’s economic model is not “market capitalist”, but a "socialist market economy". Quoting from Keynes’ General Theory that "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment", he points out, quite correctly, that this is “impossible in a private sector-dominated economy.”
China has, in the current phase of its economic development, permitted strictly regulated capitalist ventures to operate in certain economic sectors, but the state has maintained control of the commanding heights of the economy, and most importantly of the financial sector.
All land in China is owned by the state or in rural areas collective farms. Mineral resources including coal, oil and gas, arms companies, the energy and petrochemicals sectors, telecommunications, airlines and shipping remain, by law, under "absolute state control and public ownership”. Foreign joint ventures cannot be wholly owned by foreign investors, and just under three quarters have agreements recognising a trade union, including the US giant Wallmart.
On the other hand, three of China’s 128 state-owned enterprises, were listed among the top 10 most valuable companies in the world by the Financial Times in 2009 (the China National Petroleum Corporation, China Mobile and the Industrial and Commercial Bank of China). This is an unprecedented achievement for a socialist state.
This “market socialist” model allows China to benefit from the continuing dynamism of the capitalist model. The vast financial and human resources at the disposal of the capitalist countries enable them to continue to make remarkable scientific and technological advances. But at the same time China can avoid becoming in any way dependent on imperialism, and strictly limit the capacity of foreign investors to exploit its resources.
But we need to bear in mind that “market socialism” is not a scientific term but extremely imprecise and open to many interpretations. A better description for the Chinese model might be “a socialised economy with market elements and regulated foreign capital investment”.
Hu Jintao, Chinese President and general secretary of the Communist Party of China, told the party’s 2007 congress: “the current reality is that China is still in the primary stage of socialism, and will remain so for a long time to come,” and added that the Party's tasks had become more difficult than ever due developments globally, nationally and in ‘intra-Party’ conditions. But he also stressed that the party would continue to uphold and improve “the basic economic system in which public ownership is dominant”.
The CPC’s long-term aim remains to lay the foundations for creating a socialist society. Its policy puts national development and the interests of the working class and peasants, not of domestic or foreign capitalists, at the forefront.
It is important to understand that the current Chinese model is not cast in stone, but is best seen as a temporary adaptation to the enourmous tasks of development, at a time when capitalism is still the overwhelmingly dominant system in the world economy.
This is all the more so after the collapse of the Soviet Union and its allies in Comecon, which formed a significant industrial, commercial and financial counterbalance to the capitalist system up until 1990.
We also have to remind ourselves that there is no magic formula for achieving economic development in China and raising the whole population to a standard of living, education and culture comparable with the advanced capitalist countries.
To quote Deng Xiaoping, the architect of China’s economic reforms: “In building socialism we must do all we can to develop the productive forces and gradually eliminate poverty, constantly raising the people’s living standards.
“In the second stage, or the advanced stage of communism, when the economy is highly developed and there is overwhelming abundance, we shall be able to apply the principle of from each according to his ability, to each according to his needs.”
Such enourmous transformations take place very over long periods, and it will be many years in the future before that “second stage” is reached.
It would also be a fundamental mistake to conclude that there is a gradual trend towards the growing influence of the capitalist sector in China, although many in the West like to entertain such delusions. The capitalist sector is a significant, but minor one which remains firmly under the control of the Chinese state, and that is not going to change.
China’s “market socialist” policy is responsible for the vast sums being invested in the national infrastructure, in developing the poor interior and Western regions, and in entirely new sectors such as high speed railways, solar energy and electric cars. An example of the incredible speed of this development is that China already has the largest network of high-speed railways in the world.
The capitalist countries are well aware of the fact that the Chinese economic model is fundamentally socialist, and after bringing down socialism in the Soviet Union their number one aim is to do the same in China.
The real objective of ceaseless campaign for “democratic reforms” is to end China’s “socialised investment” policy as soon as possible, to divert the fruits of China’s growth into private profit, and to gain unrestricted access to China’s human and natural resources. But the CPC has no intention of following the example of the Soviet Union and allowing domestic or foreign capitalists to sieze control of the state.
It is worth considering what would happen if bourgeois democracy and capitalism were to be restored in China. Its workers would be ruthlessly exploited and millions would be unemployed, and the country would face being physically carved up, as we can see from the Western-backed separatist movements in Tibet and Xingjiang.
A capitalist China would be far closer to the examples of India or Brazil, countries which also have large scale foreign investment, but unlike China have enourmous economic and social problems and human suffering on a vast scale.
China’s economic model, based on the creative application of Marxism-Leninism, also reflects the ruling party’s analysis that although the world transition from capitalism to socialism has begun, the capitalist model is still extremely dynamic and creative, and this creativity can be utilised while restricting the rapacious nature of capitalism, first and foremost the diversion of profits and wealth into private hands.
What we are seeing today in China is a new contribution to the practical experience of building socialism. It is also similar in many ways to the controlled, or “civilised”, capitalist model which left of centre Western liberals dream of, but which will only ever be a utopian fantasy under capitalism.
This model has enabled China to play the capitalists at their own game, and effectively beat them. It is accumulating large-scale capital while resisting American pressure to revalue its currency. Where other countries would have succumbed to such bullying, China can do this because the US economy is now dependent on China’s US government bonds holdings, the profits from manufacturing in China, and China’s growing domestic market.
It is the first time in history that a socialist state, a formerly backward and semi-colonised country, has been able to even give advice on economic policy to the US government which the latter could not afford to ignore.
In March 2009 prime minister Wen Jiabao said at the end of the annual National People's Congress in Beijing: "We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. We would like the United States government to honour its word and remain a credible nation and ensure the safety of Chinese assets."
Wen also added at that time confirming China’s long-term economic strategy: "We already have plans ready to tackle even more difficult times. To do that, we have reserved adequate ammunition, which means that at any time we can introduce new stimulus policies."
It would of course be a mistake to look at China through rose-tinted glasses and ignore the negative aspects and problems arising from China’s economic model. The CPC is well aware of the widespread corruption which is a reminder that China is a huge developing Asian country which still lags behind the developed capitalist countries in overall education and living standards. As Deng Xiaoping famously warned when the reforms were introduced in China, “When you open the window to let in fresh air, you have to expect some ﬂies to blow in.”
But these problems have to be seen in the context of the enourmous tasks confronting the CPC leadership. Since the economic reforms were introduced in the 1980s rural poverty in China has fallen from 250 million to around 20 million, but 20 million is still a very large number.
On the one hand, income inequality has rocketed, creating widespread resentment, but on the other hand, the government has implemented rural subsidies, lower taxes and higher pensions.
It is also true that a considerable amounts of wealth are going to individuals and to foreign investors, but in 2002-2009 average workers’ wages increased by 8 percent a year in real terms (after… inflation. Of course this was from a relatively low level, but it shows that ordinary working people in China have benefited from economic growth.
China is currently experiencing problems with inflation, especially in food prices, a by-product of its economic success. But the government has acted swiftly, and raised interest rates twice leading to a sharp fall in food price rises.
With this spectacularly successful strategy China is laying the groundwork for the next stage of economic restructuring, developing its capacity for technological innovation, producing sophisticated manufactured goods and building its own global marketing capability.
China has no intention of remaining an “assembly line” economy for foreign companies, and its enterprises are already buying up manufacturing companies and banks around the world to lay the basis for exporting its own-brand products such as solar panels and electric and internal combustion cars.
For Marxist-Leninists the real significance of China’s spectacular successes is that it is creating a better life for its people and laying the groundwork for a future socialist society, and since the revolution there has been a significant increase in the size, influence and confidence of the Chinese working class.
Professor Ross’s analysis has identified the key element of its current economic model: utilising capitalist methods and financial resources, while channelling the capital created into social investment rather than private profit.