GLOBALISATION

China: productive might or speculative mania?

Since 1978, mainland China has been reporting year-on-year growth rates of around 8%. Those numbers are without precedence in recorded history. The massaged statistics under Mao never pretended to sustain those levels of expansion across 25 years. The Chinese miracle is the envy of the world. The 8% figure is intoned as the promise of the profits to be made by getting on board. Regular warnings appear from China and abroad about the dangers of over-heating. Rarely, does anyone ask if the numbers stack up.

A major exception to this faith appeared in the November 2003 [111 (6)] issue of one of the world’s most reputable scholarly periodicals, the Journal of Political Economy, out of the University of Chicago, home to the free marketers. The article, “Gold into Base Metals”, examines the statistical evidence between 1998 and 1998 to turn “the extraordinary into the mundane”.

The author, Alwyn Young, establishes his credentials with a willingness to acknowledge that he has been trained to make numbers prove almost anything. For many years, however, he has investigated East Asian statistics from the ground up. Instead of playing with the final figures published by central administrators, he tracks how those results are constructed. In the case of China, he begins at the village level.

Lower-level officials were rewarded for meeting expectations and punished for failing to come in on target. From time to time, the central authorities have tried to check and correct the resultant errors. For instance, “the 1994 gross industrial output estimates were revised downward by about 9 percent”. That year, the government identified 70,000 cases of misrepresentation.

Service sector notoriously difficult to measure, Its productivity is even harder to compute.

Two results
First, the size of the national product. Secondly, he looks at productivity, differentiating between agriculture and the rest.

“Systematic understatement of inflation of enterprises accounts for 2.5 percent growth per year in the nonagricultural economy”.

“The usual suspects (i.e. rising participation rates, improvements in education attainment, and the transfer of labor out of agriculture) account for the remainder”.

Productivity
“The data of most economies”, Young notes, “are filled with apparently inconsistent series. By choosing among them, one can produce almost any estimate of productivity growth imaginable”.

“The productivity performance of the nonagricultural economy during the reform period is respectable but not outstanding”.

1. the growth rate is not the highest in all recorded human history but at levels previously experienced by other rapidly growing economies”

He concludes that labor productivity has increased by 2.4 and total factor productivity by only 1.4%

Is the mainland economy about to take-off, to become the next Japan?

Look at numbers for urban job growth in the 1990s

Overwhelmingly NOT in manufacturing

Take two boom years

1994
manufacturing was 3.42m. Construction 4.52, commercial services was 13.36m. and social service was 15.29m.

in 2002 the respective figures were 2.27m., 6.11m., 4.9 and 12.09m.

see Beijing Review, 16 October 2003, p. 29 for figs from 1000 to 2002

Rostow model
Not if only snap together
If Real estate
FDI is the growth motor from internal

and export-driven

Cf Japan in 1930s or 1950s???
Or post-war Germany eg 1950

Property bubble is Shanghai sinking???

China mania 700 to one over-subscribed
On companies that have no dividends and have had their assets stripped before going on the market
Quote Beijing Review warning, but later issue???

Exports?
3.9% in 2000 up to 6% in 2003
30 of Asian electronics
in 2002, 16% of growth in world economy, second only to USA, Hale p. 36

Re-exports
Snapped together
Eg In February 2004, audio and visual components from Japan up 52% (SCMP), 26 March 2004, B8

Electronics up from 14.3% of region’s in 1997 to 30% today
Whereas Singapore’s down from 19.3 to 9.8% Hale, p. 45
Revaluation would hurt not only PRC but also Japan, South Korea and Taiwan and HK.

Notion of ‘dual hub’ Hale, p. 46

Eg of flow-on effects
The promise in Japan is exports, domestic demand sure to contract this year
Why? higher taxes, flat wages and fewer benefits from state hence more pressure to save, and contraction of domestic demand.

Bottlenecks eg electricity supply

Who is hurting in US?
Small to medium firms that have not gone off-shore
Or without FDI
Even they must get some benefits from Chinese recycling of surplus to buy US stocks or bonds to keep the US over-spending, ie debt cycle going
Driven down by Wal-Mart see NYT, 27 July 2003, BU10
Defended National Review, 19 April 2004, pp. 30-32

Imports
In first 8 months of 2003, 10% of Japanese exports to China, 42% of its export growth
HK 34 and 31
Taiwan 22% and 37%
South Korea 15% and 41%
Australia 7% and 37% of growth

Asian Wall Street Journal, (AWSJ), 20 Nov 2003, M1

Social conflicts
Peasants and cities
Selling blood and getting aids
Eg of imbalances
Between 1990 and 2002, rural per capital income up from 686 Yuan to 2476, against 1510 to 7703 for urban see Bej Rev 25 September 2203, p. 12

Big plans to “re-map social development and design a public welfare umbrella”, see BRev 25 September 2003, pp. 10ff.

Plans to find urban jobs for farmers, Beijing Review, 16 Oct 2003, pp. 28-29, includes graph of urban job growth and urban employment rate from 1990 to 2002

- the lack of jobs for university graduates recalls the origins of Great Proletarian Cultural Revolution when there were many more school grads but no university places.

Sale of assets
Biggest sell-off in history and huge rip-off by former managers
Number of state enterprises fell from 262,000 in 1997 to 174,000 at end of 2001
Process begins with leasing of assets
Lots of asset stripping
Provoking strikes South China Morning Post, SCMP, 29 December 2003, B2

- Workers in state enterprises on streets
45m. out the door 1998-2002, see Hale p. 38
[David Hale and Lyric Hughes Hale, “China Takes Off”, Foreign Affairs, 82 (6), Nov-Dec 2003, pp. 36-53]
Big emphasis on need to equalize across the country and within

Other reading on inequality etc:
See Susan Williams, Capitalism’s Comeback in China, Red Banner Reader no 7, Red Letter Press, Seattle.
Alvin Y. So, ‘The Changing Pattern of Classes and Class Conflict in China”, Journal of Contemporary Asia, 33 (30, 2003, pp. 363-376

Domestic market???
20 % of bank depositors own 80% of deposits
Not just social and political but a realisation problem.
If there is a limited urban middle class, what are the limits to the domestic market?
Alternatively, can an export sector be sustained without a domestic consumer base?
See discussion in Nikkei Weekly, 11 August 2003, p. 30

Fixed asset investment up 31% in first half of 2003, [three times that of 2000]
But consumption up only from 8.8% in 2000 to 10.1%
“this disparity may create excess capacity, limit profit margins, and eventually lead to corporate solvency problems”. Hale, p. 39

eg of excess handsets
SARS pushed inventory from one or two months to four months, 20m phones
Sales up again but with hangover
Rapid devalorisaiton , therefore slashed prices

2002 urban penetration of consumer goods
Colour tv in almost every home
Fridges and washing machines in 4 out of 5
Video players in half
Air conditioners in half
Microwaves in a third
Computers in a fifth See Hale, p. 40
Software sales up from $819m. in 1995 to $3.5bn in 2001 Hale p. 44
Autos

Urban households with Auto only one in 100, but sales up 40-50% p a
Hale, p. 40
Hale claims that could produce 2.8m. autos but only 1.8m are sold p. 38
Figs on auto industry
2002 production:

commercial 2,160,000
cars 1,090,000

total for first half of 2003 was 2.42m. expected to top 4m. for year
BRev 25 Sept 2003, p. 29

123 manufacturers
70 had output of only 1000
only two made more than 500,000
BRev 25 September 2003, p. 29

Wired?
Fixed telephone lines 397m. which is up 90 times since 1989
69m. on internet by pcs against only 9m. in 2000
200m cable tv households to reach 400m. by 2005
cell phones at 200m. and growing at 2m. a month
Hale, p. 43

YUAN
Tie to over-capacity and prospects of return to deflation

1997 crisis and devaluation hangover

lead on to
1997 and currency
decision to cop the pain to prevent a freefall of all Asian currencies
saved the global system
expect some slack now in return
pain ignored by those calling for a revaluation from US

BANKS
Much of the reform process now in the financial sector, currency rates, shares, banks and bonds, see Business Week, 8 March 2004, p. 46.

Government expects to take ten years in cleaning up mess

Four largest banks have
China Construction bank
Agricultural Bank of China
Bank of China
Industrial and Commercial Bank of China
NYT 6 January 2004, from Keith Bradsher

For Big Four have 65% of bank assets and non-performing loans,
20% of all their loans are non-performing, but if Western standards applied would be 40-50% see Nikkei Weekly, 11 August 2003, p. 30

Chinese banks and debts
Recycling some of the trade surplus
Putting up interest rates to hold down loans
But the regional networks are too strong
Sinking deeper and deeper
Cf Japan in 1990s???

1997 crisis
almost all bank branches closed in rural areas
huge job loss Hale 42

new loans from big state-owned banks up by only 8%
But from 110 new commercial city banks grew by 27%
And the latter now make 45 % of recent loan growth
And are hard to control (Hale, 42)

Bad loans
$500bn in bad loans in banking system awsj 23.12.03, p. 1
capital injections M2
sell-offs A1 7 M4

banks to get $121bn to recapitalise,
but only a stop-gap
new performing loans way above desired % AWSJ, 17 November 2003, A7

US $700bn
Impaired asset ratio 50%
With recovery rates rate of 15% AWSJ, 17 November 2003, A7

???
$US40bn to Industrial and Commercial Bank of China
the biggest lender

$US45bn to Bank of China
and China Construction Bank

from foreign exchange reserves
“The central bank admonished the banks to do a better job of controlling fraud and limiting bad loans”.
But covers only half of the NPL at the two banks

After two earlier bailouts, “further loan losses quickly eroded the banks’ catial bases again”. NYT 6 January 2004

Provincial officials pressure local manager to lend to non-performing companies
Need to central decisions NYT, 6 January 2004

Bank loans for first half of 2003 equal to all of 2002, despite attempts to rein in
Exacerbate property bubble and excesses stock of consumer durables
Nikkei Weekly 11 August 2003, p. 30

Citigroup moves to profit from restructuring of non-performing loans. Bought up $1.8bn from HK subsidiary of Bank of China
Lot of hype: face value of loans is ten times greater than market value
The Banker, December 2003, pp. 80-81

Concerns that if the foreign banks end up owning industry and then have to sack people, they and the government and the populace will collide The Banker, December 2003, p. 81

State enterprises
Beijing Review, 4 December 2003, pp. 14-15
SCMP, 29.12.03B2

FDI
Get FDI figs
$US500bn
8 times exports from 1990-2003, up to $380bn Hale p. 36

FDI accounts for half of exports and 60% of imports, Hale 38

And US earnings the from $70bn per year in contracts when???

US investment generated $7.2bn in earnings in 2000

Against $4.6bn from Mexico Hale p. 38

job creation: Du Pont has $US700m. and 3500 employees, Bej Rev, 6 November 2003, pp. 14-15

what are short, medium and long term consequences?
Will repayments act as a hobble if dividends are expected to go on for ever and a day?
As they do for Australia?
[Cf %s in Japan and South Korea, which limited FDI

is FDI overcoming realization crisis?
How much accumulation is happening? Compare Japan in post-war, with primitive accumulation?

FDI strategy “not without its dangers. Massive investment – foreign and domestic – has created a tremendous expansion of productive capacity, which may make it more difficult for producers to earn an adequate return on their capital … runs risk of developing too much industrial capacity, which could cause profitability to drop and, ultimately, firms to go bankrupt.” Hale 38

This prospect is made worse a. by propping up state enterprises and b. by banks lending to bankrupts

Stock market
Of 12million companies only 1300 listed Bej Review 4 December 2003, p. 18-19

“Still a Gamble”, warns Bej Review, 16 October 2003, pp. 32-33.
“That China’s stock market serves to save ailing state-owned enterprises is no secret”.
Stock plummeted steadily since 2000.
Investors lost $72bn in past two years
Year end August 2003, market capitalization down from 4,650bn. Yuan to 4.030bn.
As low as 38,329bn in December Bej Review 16 October 2003, p. 33

Government offered 104 state enterprises but no takers after four months because the manages had pushed up the asset values, Bej Rev 4 December 2003, pp. 18-19

Gap between Hang Seng China Enterprises Index and Shanghai
Former went up a little over 2000 in April to nearly 5000 by year end while the Shanghai market has been up from 1350 to 1700 and down to the bottom and up to 1600
See SCMP, 29 December 2002, B2

Transparency?
Executions publicised in China as deterrent and abroad as a means of reassuring the FDI-ers.
To catch up, George W. will have to extend the death penalty to his cronies in Enron.

COLLAPSE
Early in 2004, the IMF issued warnings about the medium-term condition of the US economy.
IMF warnings and global crisis?

The trigger could be anywhere, but is more than likely to be in the financial sector. Three different kinds of reason
First, because capitalism is about the accumulation of money capital (through expansion of production circuit and the subsequent realization of profits through the sale of the commodities).
Secondly, the pivotal place of money capital has become even more pertinent since the 1980s with torrents of capital seeking profitable outlets. therefore lots of new instruments and lots of swindles.
Easier to rob each other than set up a factory and sell its products.
Thirdly, blockages in the productive circuits show up elsewhere.
Take the rudimentary example of a manufacturer who had sold last year’s output to a middleman and so went ahead with an equal volume of production. Only after it was ready did the factory-owner discover that most of the previous output was still in storage. Hence, there was no market for his latest product, and therefore no way of realizing a profit.
Now many times more layered.

One rule is that the crisis will emerge where it is least expected. Never replicas of the last one because everyone is on the alert for repeat of the warning signs.

Admit that it could be triggered by the exposure of another major company fraud in the US. Little fixed up there, just more spending on PR
Mutual funds and Freddie Maes etc etc etc
Another big one could spook the foreign investors into withdrawals and thus bring on the IMF’s feared disorderly race to the bottom.

Nonetheless, if the rupture does comes through the financial system, why focus on China?
Have shown it as a hub for East Asia and East Asia as the lender to the US to finance its twin deficits in trade and the budget.
Revaluation pressures
Banking sector debts
Huge foreign reserves in mainland

Is the trip wire the roundabout of export earnings, pressures on yuan and growth of money supply leading to non-performing loans?

“The central bank has been printing yuan on a massive scale to buy dollars and prevent the yuan’s appreciation. The central bank has than taken some of the extra yuan out of the financial system by selling bonds and withdrawing from circulation the money that is used to pay for them.

Enough yuan have nonetheless been issued to allow banks to lend more money in the first seven months of 2003 than in all of 2002. This has prompted fears that the banks may have engaged in another round of reckless lending that will produce a fresh wave of defaults in the next several years”. Keith Bradsher NYT 6 January 2004

AUSTRALIA
Australia on another of our cargo-cults that someone else will make us rich
A colonized mentality from being run by UK and US
1960s belief that Japan would redeem us from Balance of Payments chronic problems
If only the Chinese would put sugar in their tea and wear woolen socks