Doomsayers Corrective

“China – the Bubble That Never Pops,” by Thomas Orlik, 2020 
This is a bourgeois economist’s analysis of why the Chinese economy, given its vast debt burdens, hasn’t gone into severe recessions or depressions yet.  Orlik, a reporter for Bloomberg and the WSJ who lived in China for a long time, supports the complete privatization and marketization of the Chinese economy.  But he’s honest enough to detail how these kind of deep crises have not occurred in the Chinese economy - yet.  Orlik says that “China itself is the innovation.”

China is still enmeshed in a capitalist world economy.  Given the hard blows from the rest of the capitalist world – long-term Japanese stagnation, the 1997 Asian financial crisis, the U.S. 2008 Wall Street collapse of securitized mortgages, the European sovereign debt crisis – China as a whole has avoided many of the consequences in spite of the large debts accumulated by its public and private sectors.  China now has to deal with the severe CoVid recession, a U.S. trade war and military encirclement, but that is not in the book.  Orlik explains in macro-economic detail how China has avoided the worst effects of four cycles containing at least six economic crises.

CHINA’s CLASS CHARACTER

This book relates to the endless debate on the class character of Chinese society.  It is pretty clear that in any retelling of the ups, downs and sideways moves of the Chinese economy since 1978, two forces are always at work.  On one side in this dialectical war is the Chinese Communist-Party (CCP) dominated economy – a planned and state-owned industrial and banking sector; CCP run local governments; a restricted capital account, a controlled foreign exchange market and blocks on external capital outflows.  On the other side is the capitalist and imperialist export sector; the private shadow banking and financial sectors and the private real estate construction sector. Many of these enterprises have CCP cadre planted inside them. The state monopoly on foreign trade and a fuly-controlled yuan value are no longer in effect.  As Orlik points out ‘reform’ – i.e. a neo-liberal market orientation – has generally grown for 42 years since 1978, enabled by the CCP and a parade of its leaders.  1978-2002 was when the ‘iron rice bowl’ and agricultural communes ended, for instance.

The question is, what has been created? A fully capitalist state and economy, or a deformed workers’ state run by bureaucrats attempting to promote and still control an ever-growing capitalist sector?  After all, even billionaires are now allowed in the CCP and in government positions.  The book shows that China has a better-regulated economy than almost any capitalist country, as Orlik compares actions in China with similar ones in Korea, Japan and the U.S.  The book gives ammunition to both sides in the debate but it clearly shows the ‘market’ is not in full control.

To Orlik, the state keeps the capitalist economy in check, which is why deep recessions and depressions don’t happen.  Orlik contends the ‘commanding heights’ of the economy are in the hands of CCP bureaucrats, not a private capitalist class.  I.E. the state basically controls the economy, not 'the market.'   To Orlik some of the worst effects have been slower growth rates, massive overcapacity, business bankruptcies and workers thrown out of jobs and peasants off their land. Behind the 1989 Tienanmen Square events - which many thought was only about ‘human rights’ - the economic situation was deteriorating for workers and farmers.  This is why workers joined some of the protests due to “a misstep on reform – moving too quickly from government to market-set prices” as Orlik puts it.  High inflation was the result.  The CCP wants to avoid this happening again.

SEMI-PLANNED ECONOMY

Orlik does not spend much time on the conditions for workers or farmers or the agrarian economy.  He does mention the internal hokou system frequently.  Hokou walls rural migrants out of social programs in the cities, even preventing their children from getting an education.  It defines two kinds of Chinese citizens – a rural underclass of temporary workers in the multi-millions and a more settled urban working class.

Orlik’s wider topic is to expose why all the China doomsayers in the bourgeois press have been wrong so far.  He picks apart each economic crisis in detail and how the government handled it.  He starts with the 1989 Chinese market price initiation and subsequent shutdown, the same year the Japanese real estate bubble burst. That was followed 10 years later by the 1998 Asian financial crisis and 10 years later the 2008 great sub-prime financial crisis, both hammering exports. In 2012 in Wenzhou the sovereign debt crisis closed factories, leading to the state curbing shadow banking and real estate speculation.  The government even put a cap on house prices.  Shadow banking involves a 3^rd party making loans to a high risk entity while the bank buys a ‘security’ from the shadow bank, so the money actually comes from the initial bank.  To Orlik shadow banks are “too small to cause a systemic crisis.”

In 2013 there was a money market crisis of high interest rates that almost caused major defaults, cured by People’s Bank of China (PBOC) intervention in the money markets.  Orlik notes that a very small fraction of the population, 5%, is actually caught up in the financial markets, so losses are not widespread when a financial market seizes up.  That was followed in a 2015 equity crash due to yuan market depreciation, which caused the government to shut down trading and stop capital outflows of any kind.  By the way, most of the funds and brokers were state-owned! As part of market regulation, China controls foreign speculators in Chinese assets, who are nicknamed ‘crocodiles.’  In 2016 the Chinese government used what Orlik terms “supply-side reform” to reduce overcapacity.  One province closed 510 coal mines.  Zombie firms were merged, restructured or closed, while ‘public-private’ partnerships were introduced for infrastructure projects.  This led to further ‘slum clearance’ and moving many people into better housing. 

Skyscraper socialism?

DEBT

In the late 1990s many state enterprises were ‘de-leveraged’ by premier Zhu Rongji and CCP secretary Jiang Zemin, with millions losing their jobs.  This was supposedly due to the massive and continual debt of state and private actors.  Yet the state continues to back up most unprofitable state companies or public governments to maintain jobs, so the enterprises do not fear going out of business.  This is no small matter, as the Chinese state industrial sector’s revenue is larger than Germany’s GDP and has been growing since 2014.  Orlik considers this government guarantee a ‘moral hazard’ in capitalist terms.  Yet to Orlik, “state firms smooth the ups and downs of growth, drive the government’s development strategy and provide patronage opportunities…”

Orlik focuses on the high savings rate in China, as its inadequate welfare system makes citizens cover many expenses themselves.  This leads to low consumption by the working-class population.  For many years, deposit and loan rates were set, but now they are left to ‘float’ based on the market.  Like Greenspan, Orlik tries to blame the 2008 U.S. crisis on Chinese savings invested in U.S Treasuries by Chinese state banks.  This led to low U.S. interest rates, leading to low interest mortgages, leading to anyone with a pulse qualifying.  This of course leaves out many things – like no-doc mortgages, fraudulent paperwork, the dollar standard and securitization.  The high domestic savings rate and blocks on money transfers out of China give the large state banks stability and size, as they are the biggest in the country.  The state-owned Industrial & Commercial Bank of China is the largest bank in the world by assets.

Orlik points out that local governments sell peasant land to real estate developers to gain funds, a practice partly behind the recent Chinese property bubble after the 2008 Wall Street collapse.  According to Orlik these formerly unoccupied buildings and infrastructure are slowly being used - but that is still up in the air.  At that time the 4-trillion yuan stimulus initiated by Wen Jiabao in November 2008 helped stabilize the world economy and allowed growth to continue in China.

The present CCP general secretary, Xi Jinping, has launched another large campaign against corruption. Corruption actually depresses growth.  Corruption, not labor exploitation, is how a bureaucracy gets richer. Tens of thousands of officials have been caught.  Even a cursory knowledge of the various bureaucratic strata in eastern Europe or the USSR shows they did not live like filthy-rich capitalists.  In East Germany the ruling bureaucratic caste was very small and tight, but not wealthy.  Think of a high union boss and you get a bit of a picture of their lives.   Now think of Jeff Bezos.  A big difference.

Orlik spends a bit of time on the ‘Belt & Road Initiative” and Trump's new cold war which started under Bill Clinton. He also discusses vastly accelerating tech R&D, with China spending almost as much in 2017 as the U.S. as part of a ‘Made in China 2025’ plan.  Tech focuses like AI poses a threat to human jobs everywhere, including China.

Theoretically Orlik mentions that the CCP now believes that ‘public ownership’ is the sum total of socialism, ignoring planning, workers’ control, equality, exploitation, social basics, a classless society or any other parameters.  To many Marxists, this is almost laughable.  China is one of the most unequal societies on the planet, given its leadership is more concerned with being a developmental state than anything else. The Chinese proletariat will one day rise up and take political power away from the bureaucratic strata and their capitalist allies and move towards full socialism in league with others.  But in the process no one must forget the massive gains that must be preserved in China.

Other prior blog reviews on this subject, use blog search box, upper left:  “Two Sea Changes in World Political Economy,” “Is the East Still Red?” “From Commune to Capitalism,” “The End of the Revolution,” “Jasic Factory Struggle,” “China’s New Red Guards,” “The Rise of China,” “The Fall of Bo Xilai” “Maoism & the Chinese Revolution,” “Striking to Survive,” “China on Strike.”

And I bought it at May Day Books!

Red Frog / September 4, 2020