The looming potential default of the Chinese property giant Evergrande is sending shivers down the spines of capitalists across the world.
Decades of growth in the Chinese economy have seemingly continued with no end in sight. But the potential collapse of the second largest property developer in China reveals inherent instabilities in the Chinese economy, which is now the second largest in the world.
The Evergrande crisis is a major thorn in the side of President Xi Jinping’s government, which has been on a warpath to clean up the excesses of Chinese capitalism.
While Evergrande Group chair Hui Ka Yan has an estimated $US11.8 billion fortune, 1.6 million people stand to lose homes they have already begun paying for. Evergrande bosses also convinced 70,000 staff members to lend money to the company. People, including staff members, have been protesting outside Evergrande offices across China.
The Chinese government managed a dip in its growth during the 2008 global economic crisis by pumping money into the economy, lowering interest rates and launching massive state infrastructure programs. Like in Australia, these measures led to a boom in residential real estate.
According to Goldman Sachs, the total value of Chinese homes and developers’ inventory hit $US52 trillion in 2019, twice the size of the US residential market. Many economists say that the current boom eclipses that of the US housing bubble in the 2000s which precipitated the 2008 global crisis.
According to the Wall Street Journal, at the peak of the US property boom, about $US900 billion a year was being invested in residential real estate. In the 12 months to June, about $US1.4 trillion was invested in Chinese housing. More was invested last month in Chinese real estate than in any other month on record.
Marxist economist Michael Roberts points out that Evergrande’s debt of $US300 billion should be compared to total credit outstanding in China of $US50 trillion, that is, not very large. However, it shows how China’s official annual growth numbers have been fuelled by speculative investment.
Roberts argues that with sectors such as manufacturing and hi-tech communications growing more slowly, the real estate boom allowed authorities to claim real GDP growth of 6-8 per cent a year.
The collapse of the US housing bubble in 2008 is a clear warning of the dangers of speculation in a highly indebted economy with low growth in productive sectors of the economy.
Karl Marx’s understanding of economics is central to understanding the unstable boom and bust cycle of capitalism.
Marx argued that the very nature of economic booms leads to busts. Capitalists are motivated by making higher profits. During a boom they throw increasing amounts of money at investment. But in the process the rate of profit (their return on investment) decreases.
This is because the underlying source of value is human labour time. Each capitalist invests in the latest machinery and technology to grab a bigger market share and more profits. Once every capitalist has caught up, the amount of labour used in production shrinks proportionately and the rate of profit declines.
Governments across the world, including China’s, have responded in recent years by launching monetary stimulus, pumping billions of dollars into the economy.
However, Marx also outlined the highly contradictory nature of the boom and bust cycle. Economic crisis bankrupts the weakest companies, reducing the high rates of machinery and technology relative to labour and clearing the way for a new cycle of boom.
But as Marx pointed out, corporations tend to merge or swallow up smaller companies to try to mitigate declining profit rates. Since the major global economic crisis in the 1970s, governments have been reluctant to allow corporations to fail because they have become so large that their collapse would have a major impact on economies. The result is slower growth.
This has led to debates about whether governments should step in to save companies on the verge of collapse. The Chinese government has been unwilling so far to save Evergrande, with the possibility looming of the company being formally declared in default as we go to press.
The government will likely assist in some form this time but the inherent instabilities in the Chinese economy and global capitalism persist.
Meanwhile, Xi Jinping’s government is cracking down on the “disorderly expansion of capital”, putting on trial—and even to death—wealthy elites in an attempt to improve the image of Chinese capitalism and be seen to deal with corruption, particularly among government officials.
A critical question for the Chinese working class will be the strength and growth of the workers’ movement and its ability to defend jobs and homes.
By Feiyi Zhang