Kevin Rudd and many in the mainstream press once said that Australia’s economic relationship with China would provide a cushion in the current economic crisis. Tom Barnes examines the state of the Chinese economy and whether this is still true

“CHINA’S POSITION as the last bastion of support in a weaker world economy is not the sure bet for Australia that it once was,” claimed Financial Review reporters the day before the US House of Representatives rejected Bush’s first multi-billion dollar financial bailout package: “The country is waking up to a harsh new reality: as the factory of the world, China cannot escape the economic pain of its big customers.”

A month ago Australian policymakers believed that China and the resources boom would help create a buffer against the US downturn. Kevin Rudd told one newspaper that China’s rise as an economic powerhouse had the might to restore global growth.

Yet many economists are now fearful that Chinese growth could be severely curtailed, exposing Australia to the full force of the global crisis.

Can Australian capitalism rely on Chinese demand for natural resources? And what light can Marx’s theory of economics shed on this issue? This article attempts to answer these questions.

The neo-liberal case

Neo-liberals—policymakers, politicians and economists who promote free market economic policies—have long championed the emergence of China as a major capitalist power.

There is no doubt that the Chinese boom is massive. China has consumed four-fifths of the world’s copper since 2000. It consumes half the world’s cement, a third of its steel and quarter of its aluminium.

China’s emergence has led to claims that it is already central to the health of the world economy and may surpass the economic power of the US within as little as 20 years.

Ross Garnaut, the economist who is best known as the architect of mainstream climate change policy, is perhaps the leading advocate of this argument in Australia. Garnaut argues that we have entered a period of unprecedented growth and economic prosperity which he calls the “Platinum Age”, which exceeds the “speed, magnitude and breadth” of global economic growth during the 1950s and 60s. He forecasts that it will lead to more wealth creation in the first two decades of the twenty-first century than in all previous human history.

China is central to explaining this because he thinks there are “reasonable prospects” for Chinese growth rates “in the vicinity of 10 per cent per annum—or even higher for a while—to continue for a considerable period and for growth rates to remain high until average Chinese productivity levels and living standards are approaching the range of industrialised countries in the late 2020s”.

Garnaut may be concerned that global warming will undermine this scenario—but his argument is nonetheless a supremely optimistic view of global capitalism in general and the role of China in particular.

China’s growth has been massive. But Garnaut is wrong about the Platinum Age. Average world economic growth is substantially lower today than the period between the 1950s and the mid-1970s.

China has made a significant contribution to world growth but, in proportional terms, it is no more significant than the rise of Japan and West Germany in the 1960s. In historical terms, it is nowhere near enough to re-create the conditions that underpinned the full employment and full-time job stability of the golden age.

For Garnaut’s prediction to come true, China would need to sustain its growth indefinitely and world growth rates would have to start to accelerate rapidly—at a time when most economists say we are in the middle of the worst financial crisis for three decades.

The rise of China

Neo-liberal Sinophiles like Garnaut downplay the very real problems that Chinese industrialisation has created. For example, rising Chinese incomes are based upon massive levels of repression, exploitation and urban and regional inequality.

This is not the prosperous “development” of neo-liberal fairytales but a process of capitalist expansion that only Marxism can fully grasp.

As early as 1848, Marx understood that capitalism was a new system of perpetual expansion that, in Marx’s words, “cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society…”

Marxists should not be surprised by what has occurred in China. In historical terms only the rapid industrialisation of Stalinist Russia in the 1930s surpasses contemporary China in terms of the pace and intensity of change.

It is important to understand how this has happened. Before 1978, China pursued a state capitalist model in which the state repressed the consumption of workers and peasants in order to divert surplus into heavy industrial production.

This strategy, copied from Stalin’s approach in the 1930s, caused untold suffering. It also led to comparatively inefficient industry so, by the 1970s, states which pursued this road were poorly equipped to compete with other major capitalist states.

China’s ruling clique began to realise this in the mid-1970s and by 1978 they had cleared the path for radical reform—shifting to embrace more open free market capitalism.

One of their first reforms was in agriculture. The state separated the old state-owned rural communes into household plots which were leased to farmers for 15 years (and later 30 years). It set its own price for crops and livestock, but it also paid a premium price if farmers were able to produce more. Farmers were allowed to sell surplus production onto the open market.

Once the reforms kicked in, agricultural output exploded to 8.5 per cent a year between 1980 and 1985, compared to just 1.4 per cent a year between 1957 and 1978. Fast growth also allowed some farmers to become rich at the expense of others and rural inequality began to rise.

Secondly, the state created what are called Township and Village Enterprise (TVE). TVEs were operated by local government authorities, but were allowed to produce for the open market.

Thirdly, the state established “special economic zones” to attract foreign investment. It did so in the belief that foreign corporations could help to lift economic growth and encourage trade with the rest of Asia.

Incentives included allowing multinationals to hold 100 per cent ownership of local assets, tax cuts, and cheap provision of infrastructure.

Finally, the state assisted the expanding market capitalism by massively increasing the exploitation of workers. It did this by rationalising state-owned enterprises (SOEs) and by exploiting migrant workers. Exploitation existed under Mao. But the Maoist state encouraged a minority of workers to identify with centralised industry by providing secure employment and restricting migration from rural areas (hukou).

After 1978 the state radically changed this policy. It began to sack thousands of workers in the old factories, ended the promise of lifelong employment and welfare (sometimes referred to as the “iron rice bowl”) and intensified the exploitation of the remaining workers.

Hukou was used in a different way—not to prevent peasants from coming to the cities, but as a means of creating a legion of low-wage, precariously employed workers.

So today about a third of Shanghai’s population is non-permanent, i.e. it has no legal right to live or work there. New arrivals earn about a fifth of the average income of employed permanent residents.

Using the unemployed masses as a way of disciplining workers is something Marx identified 150 years ago, calling it the “reserve army of labour”.

The growth in China’s reserve army is unprecedented. In the early 1980s, there were two million rural migrants looking for work. Today there are perhaps 80 million.

Contradictions of capitalism

But Marxists also understand that the forces of capitalism, once unleashed, cannot be fully controlled by the ruling class. Today’s China faces significant obstacles to continued growth.

Environmental destruction is rampant. Global warming is very likely to contribute to instability. For example, the Intergovernmental Panel on Climate Change argues that for every one per cent rise in average temperature, Chinese rice production will fall by 10 per cent.

The global financial crisis and rapid urbanisation are contributing to high inflation. For example, Chinese food prices rose by 23.3 per cent in the last year. Wage disputes and social unrest are on the rise.

Some economists, like Garnaut or policymakers at the World Bank, argue that these and other problems will not stop China continuing to grow rapidly. Some argue that the consumption of China’s own middle class can substitute for declining exports. They have encouraged the view that China can “decouple” from the West.

Other economists argue that because China sells so many manufactured goods in Western markets, a downturn in Western demand will inevitably lead to a downturn in Chinese industry. While no one yet knows what the final effect of the world financial crisis will be on China, growth this year is expected to be cut from double figures to about 8 per cent. Some think it will fall far more than this.

Tens of thousands of factories that once produced textiles, shoes and cheap electronic goods have already closed in the Pearl River Delta. Just to keep growth at the forecasted eight per cent, they argue, the government will have to massively expand state investment in fixed capital such as roads, railways, factories, power stations, and construction.

This suggests that there has been a fall in private sector investment in China. China faced similar problems during the Asian economic crisis ten years ago but was able to keep growing by massively increasing state investment from 10 to 70 per cent.

With world markets in decline, China’s ruling elite will hope that it can again spend its way out of the crisis.

But there are two crucial differences today compared to a decade ago. One is that inflation is rampant. The second is that China’s rate of profit appears to have fallen rapidly.

The only way to fully appreciate this problem is to return to Marx. China’s experience demonstrates that a high rate of investment can drive very fast growth. But, as Marx identified, it can expand much faster than the rate of labour exploitation. This is because, while there are physical limits to how fast capitalists can hire workers or how long or hard they can be forced to work, there is no such limit to the rate of investment in capital goods.

This is crucial to understand because only the productivity of labour, not capital, can produce more profit for the system. As a result the ratio of capital to labour rises (what Marx called the “organic composition of capital”) and capitalists must invest ever greater amounts just to maintain the same proportion of profit.

Some recent studies of China seem to confirm this hypothesis. According to work by Phillip O’Hara at Curtin University in Perth and some Keynesian-influenced economists at the Asian Development Bank (ADB), the organic composition of capital has risen and the rate of profit has fallen sharply since the 1980s.

According to ADB figures, the growth in the stock of capital has run at 11-12 per cent a year since the 1980s. Gross fixed capital formation—which measures only new investment—stood at 43 per cent of the entire economy in 2003.

As a consequence, it calculates that the rate of profit for all industry fell from 13.5 to 8.5 per cent from 1980 to 2003. American economist Nicholas Lardy has calculated that the rate of profit for SOEs fell from 25 to 5 per cent from 1978 to 1999.

The rate of profit is important because it is the only way of understanding how the system can survive shocks at one point or plunge into crisis at another. On one hand, the high rate of investment can make it seem as though growth can last forever, even if it is slowed down by external pressures.

On the other hand, if the rate of profit is squeezed to a certain point, any kind of unpredictable disturbance—a stock market crash, a currency revaluation, a handful of bankruptcies, higher costs of production or virtually any other unpredictable event—can spark a crisis.

It is difficult to predict with certainty whether the global crisis will shave a few percentage points off China’s growth or whether it will follow Europe and North America into recession.

This is partly because the problem of profitability can remain hidden. So today in China half of all the capital stock is financed by four banks whose actual health is unknown, just as the health of the Wall St investment banks was unknown prior to the subprime crisis. It is estimated that a quarter of all loans, worth 17 to 20 per cent of the economy, are “non-performing”.

In other words, they have lent to industry that is too inefficient or too unprofitable to make repayments.

China’s rate of investment is thus a double-edged sword. On one hand, it is driving spectacularly fast rates of growth and this is contributing to growth in the wider system. On the other hand, this very process erodes profitability that must lead to crisis at some stage.

Crisis is an inevitable aspect of capitalist expansion. That’s why it is a neo-liberal myth that China can keep growing indefinitely. It is only now, however, that economic commentators and our leaders are beginning to realise it.

The prognosis for Australia

China’s impact on Australia is significant. For example, China’s iron ore imports have risen by an average of 27 per cent a year since 2004 and 40 per cent of the world’s iron ore comes from Australia.

It should not be a surprise that this has an impact on Australian growth, particularly in the mineral-rich states of WA and Queensland. Last year China unseated Japan as Australia’s biggest trading partner overall.

But it is also widely understood by economists that the resources boom offers only a partial explanation for the growth of the Australian economy. As The Economist put it in March, China “is not the be all and end all of the Australian economy.”

Various factors have driven growth in global capitalism since the early 1990s. These include an increase in the exploitation of workers (longer working hours, lower real wages, etc), speculation in debt and finance, the centralisation of capital into the hands of fewer and fewer corporations, and so on.

Australia retains a diverse trading base. It mainly exports minerals and imports cars, petrol and consumer electronics, contributing to a large trade deficit. Its major export destinations in 2007 were Japan (18.9 per cent), China (14.1 per cent), South Korea (8 per cent), the US (6 per cent) and New Zealand (5.6 per cent). China was its biggest import partner (15.5 per cent), followed by the US (12.6 per cent), Japan (9.6 per cent), Singapore (5.6 per cent) and Germany (5.2 per cent).

This means that Australia is just as influenced by conditions in Japan, Korea, the US and Europe as it is by those in China. But these countries are also impacted by the global financial crisis—many already on the brink of recession.

Chinese demand and Australia’s mineral riches has handed our rulers a strategic option that does not exist for countries such as Britain or New Zealand. But greater options do not mean Australia is immune. Already the drying up of credit, the downturn in housing and construction and global inflation are driving up the cost of living and eating into our living standards.

Now the resources boom appears to have ended as well. Mineral stock prices have collapsed by 20 to 30 per cent in the last three months. China’s slowdown is one cause of this. For example, 55 per cent of China’s demand for steel comes from housing and construction, which appears to be rapidly slowing.

All of a sudden, the idea that China will save us is looking decidedly shaky.

1 COMMENT

  1. Thank you for such a well thought out, detailed and non-biased article. It so difficult to find an article so fact filled and clearly laid out.

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