National Sections of the L5I:

China and International Perspectives

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The purpose of this paper is to provide information and explanation to support the section on China in the international perspectives draft. Much of the discussion about China and its impact on the global economy necessarily involves reference to various series of statistics and these raise important questions about methodology and reliability of those statistics. For the sake of presentation, I have tried to clarify issues surrounding the use of statistics in an appendix but this should not be taken to mean that they are peripheral to the main subject matter.

The main proposition in the perspectives draft is that the restoration of capitalism in China has played an important role in the stabilisation of global capitalism, particularly with regard to the USA, but that, simultaneously, it has created political-economic dynamics which are inevitably destabilising China internally. Precisely because of China’s importance globally, if, or when, these have an impact on the continued expansion of production they will have a correspondingly destabilising effect on the global economy.

At a very fundamental level, the cause of instability is the contradiction between the party dictatorship inherited from the degenerate workers’ state and classes being brought into existence by the restoration of capitalism. However, how that contradiction makes itself felt and what conflicts it creates obviously varies with economic conditions and the class positions of the actors involved. Because, in the words of Jiang Zemin “the party represents the most advanced mode of productive force, the most advanced culture, and the interests of the majority of the population” it has the constitutional right to override all other agencies within China. For example, it is quite widely understood that many, if not most, of the 84,000 incidents of public protest reported in the last year were responses to the reallocation of agricultural land, often without compensation, by local party secretaries who can over rule elected village leaders.

What is not so widely known is the way in which the party imposes itself on absolutely all forms of social organisation. By 1995, for example, there were 1810 national business associations and another 200,000 at provincial and local level. These associations bring together all the firms in specific economic sectors and it is only through them that the firms can make representation to the state. These organisations are chaired by party appointees. Exactly the same is true of, for example, trade union organisations, women’s organisations, youth organisations, professional associations and so on. As capitalist social relations deepen, so the ability of the party to “coordinate” the increasingly conflicting interests will weaken. At the same time, all attempts at self-organisation will bring groups into open conflict with the party.

The party, of course, is the political expression of the bureaucracy which was largely brought into existence by the development of the planned economy. Its position as a ruling caste also stands in contradiction to the emergence of the bourgeoisie as a ruling class. This is not, of course, because capitalism abhors bureaucracy or, indeed, dictatorship, but because of the potential contradiction between the priorities of maintaining bureaucratic power and interests and the priorities of the owners of major blocks of capital, Chinese or foreign. For example, the bureaucracy recognises that it needs to allocate huge resources to the development of the interior and the improvement of the living conditions and income of the rural population and it will probably fund this through the state-owned banking system. That, however, will potentially deny funding on a commercial basis to capitalists who want to expand production in the here and now. Equally, the bureaucracy cannot wait for the “natural” emergence of Chinese corporations that can compete internationally. Instead, it uses state subsidies and contracts to create such “national champions” out of, for example, sections of previously state-owned industry. This can, potentially, bring it into conflict both with Chinese capital and imperialist capital.

Destabilising factors

The perspectives make the point that WTO accession will sharpen the contradictions within Chinese society. At a general level this is because accession has provided a further boost to the capitalist class and that in itself sharpens contradictions. In a more immediate or concrete sense, accession has provided a huge boost to exports. According to the National Bureau of Statistics, taking 1990 as a base point of 100, by 2002, the first full year of WTO membership, GDP had grown to just over 300 and exports to approximately 500. Three years later, the latest figures available, GDP was in the region of 450 while exports were approaching 1300. (Cited by the Economist March 25)

Gaining access to new markets was one of Beijing’s principal reasons for seeking WTO membership. The scale of new opportunities, however, has led to a massive increase in fixed investment, as exporters, and potential exporters, scrambled to get their slice of the action. In 2003, such investment accounted for 45% of GDP. The most recent official GDP figures, which have been revised upwards because of an increase in the estimation of the size of the services sector, give a growth rate of 10.1% in 2004 and 9.9% in 2005. To sustain such growth suggests either a continuation of such expansion of productive capacity, rates which are characteristic of the high point of a boom cycle, and continued exponential growth of exports, or major changes in the proportions of the economy. Figures for the last quarter of 2005 indicate a slowing in the rate of growth of exports.

Sustaining the previous rates of growth seems unlikely, to say the least, yet without it there will be reduced returns on that huge volume of capital invested in new factories, machinery etc. Any downturn in production would have serious domestic consequences because there is little in the way of a safety net either for laid off workers or, indeed, for capitalists with no markets.

While the positive benefits of WTO membership, in terms of access to overseas markets, took virtually immediate effect, China was allowed to stagger the introduction of other parts of the accession treaty because of the difficulties they were expected to cause. The one most frequently commented upon was the reform of the banking system because of the huge volume of “non-performing” loans held by the state owned banks. This is an example of a continuation, in a new context, of the practices inherited from the old planning system. In that system, funds were allocated via the banks according to political priorities and not according to projected ability to “repay” by the ministries or enterprises who received the money. Both for state owned enterprises and for projects backed by local government and/or local party bodies, this approach has largely been maintained but, the banks are now supposedly commercial operations so the funds are debts.

Much of the infrastructure to support the huge expansion of industry in the coastal provinces has been paid for in this way and, because of the high degree of autonomy enjoyed by many levels of local government, from the provincial down to the village, there has been the huge degree of duplication. Harvey, for example, cites the construction of five international airports in the Pearl River delta, all within a 100 kilometre of each other but the problem is more characteristically excessive investment in productive capacity or speculation in real estate values.

There are several levels of problem with this situation. At the formal level, holding such a huge stock of bad debt contradicts international banking standards, China’s banks are, in effect, insolvent. Progress towards the resolution of this problem has been made by transferring the debts to “Asset Management Corporations” which takes them off the banks’ books. Rather more importantly, from 2007, foreign banks have the right to operate in China, providing possible credit lines to private businesses which have in the past not been a priority for the state banks. This could provide an important boost to private capital, allowing it to develop much more independently of the state and party.

At the same time, of course, it would also give the foreign banks the decisive say in the direction of future investment. However, this will take time since the banks cannot even begin to establish themselves until next year.

In terms of the development of a fully functioning capitalist system, however, the biggest problem with the existing banking system is that it is not an efficient means of allocating capital to the most profitable sectors. The more that capital grows as a social force, the more this will bring it into conflict with the party dictatorship.

A more immediate contradiction that will be sharpened by the terms of the WTO Treaty is that between foreign and domestic firms in the field of taxation. At present, foreign firms receive extremely favorable treatment. On average, Chinese firms pay twice the tax of foreign firms but this is not allowed under WTO rules. Resolving this will cause a difficulty for the state, particularly because it has recently announced a major programme of investment in the interior, including infrastructure development, support for farm incomes and introduction of free education and a social security system. Levelling taxes up, so that foreign firms pay the same as domestic, would act as a disincentive to the all-important foreign investment while levelling down, so that domestic firms have the same treatment as foreign firms, would deprive the state of a major source of revenue. Clearly, finding the point in between where revenue is guaranteed but foreign investment is not threatened could prove difficult.

Class differentiation

The immediate impact of WTO accession will both reflect the long-term class development and differentiation that has been taking place since the late 1970s and, in turn, contribute to the process. Official Chinese statistics do not use class categories so it is not at all easy to trace the development of the classes. In terms of population registration, the major distinction recognised in official figures is that between urban and rural. Since 1975, the urban population has grown from 18% to 30% (in 2000) and this represents an actual population of some 400 million (according to figures given by Story, page 71). According to the OECD report on agriculture, 2005, there are 200 million farming households and figures for 2000 said that the agricultural workforce numbered 370 million and this was reckoned to be some 50% of the entire national civilian workforce.

Helmut Peters, of the Munich based Institute for social-ecological economic research, used a range of official statistics to estimate the size of the employed working class (although it is not clear what definition of the working class he was himself using) and arrived at a figure of 275 million. Harvey quotes figures from China Study Group giving 270 million urban workers in 2000 and a further 70 million still registered as farmers but actually established as wage workers in cities. What is not clear from these figures is whether they include the rural proletariat employed in “township enterprises". Harvey gives a 1995 estimation of 128 million in this category. He also cites a figure of 114 million migrant workers, described as an “official count” in a New York Times article.

Given that, in 1978, employment in the state industrial sector, essentially synonymous with the urban working class at that time, was 95 million, it is safe to say that since then the working class has at least trebled in size. It is also clear that it is very far from an homogenous class, varying from second or third generation workers in heavy industry to the millions of young workers, mainly young women, newly arrived from the countryside and dragooned into assembly plants in the coastal provinces and a 100 million or so illegal migrant workers working as casual labourers throughout the big cities and construction projects.

Although registered urban workers do have rights of residence and some entitlement to social security and pension, much reduced from the “iron rice bowl", other workers have virtually no rights. The plight of migrant workers, in particular, has now been officially recognised in that the 11th five-year plan calls for an improvement in their conditions, possibly because plans for developing agriculture call for further emigration to the cities. The World Bank reports that urban incomes have increased by 9.6% in the last year (page eight) and also that there has been an increase in household and consumer credit spending. Given that China has the highest per capita saving rate in the world and that it is unlikely to be workers in sweatshops or construction sites that are now paying on credit, much of this average income increase can be assumed to have gone to the small percentage of the urban population who definitely have benefited from, for example, real estate speculation.

Terrible conditions and poor prospects do not, of course, automatically cause revolutions or even rebellions but they do provide the context in which workers struggle to defend themselves, assert any rights to which they are entitled and, as a result, organise themselves. There is a steady stream of reportage, monitored by China Labour Watch, of strikes and demonstrations and workers pursuing legal claims, pressurising union officials and local government over their grievances and all of this points to a working class in the process of formation. After the privations of recent years, it is likely that workers at least in some sectors where demand has been high, for example, in export industries and also in the State Owned Enterprises, many of which are now reporting profits, will press for wage increases and improvements in conditions. Equally, we should expect resistance if any decline in orders is passed on as wage cuts or lay-offs.

Given such a lead, other sections could be expected to follow and any such movement would immediately be confronted by the repressive forces of the state, as they already have been in various locations which we have reported on. By definition it is difficult to assess either organisation or consciousness under dictatorship but it is not yet 20 years since the crushing of the democracy movement in Tiananmen Square was followed by general strikes across all the major urban districts of China and working class has grown since then. There is no reason to think that the Chinese working class will be any less capable of mass mobilisation than the working classes of, for example, Eastern and Central Europe.

Both the government and the main international commentators have realised the significance of widespread peasant protests that have been widely reported. Seizure of land for housing or industrial development without adequate compensation is one of the most common causes of protest, Harvey suggests that 70 million farmers may have lost their land in this way (page 146) in the last decade. Paradoxically, quite apart from the greed of local officials, central government outlawing of the levying of arbitrary local charges and taxes may have contributed to this.

At a more general level, Chinese agriculture, which reached the limits of the growth that could be achieved on the basis of the “Household Responsibility System” introduced in the early Eighties, by the early Nineties, and has tended to stagnate ever since, is now faced with a major restructuring which, again, will be accelerated by WTO accession. The problem is that the average farm is only 0.65 hectares and even this is usually distributed over several plots. Everybody registered in a village is entitled to enough land to feed their family and, despite nominal 30 year leases, land is often re-distributed every few years to take account of population changes. Thus, although farming is market-oriented, rather than subsistence, the logic of capitalist development through consolidation of land holding and reduction in the overall number of farms is blocked.

Since joining the WTO, Chinese agriculture has gone from being a net export earner of some 5 billion US dollars per year into a net importer, particularly of cereals and oilseeds, to the tune of $11 billion. When faced with such questions of strategic policy, the Beijing bureaucracy always concedes to the interests of capital, although often only after a number of pilot projects have been evaluated. WTO accession does not give them very much time for such experimentation. The five-year plan calls for extensive reform in the countryside to improve incomes, provide social security and education but this will only be possible if the overall rural population is reduced, the figure most often referred to is a surplus of 175 million people.

Capitalist development of agriculture would mean the consolidation of land holdings, a further shift away from cereal production and towards vegetables, fruit and livestock which, are both more labour-intensive and have greater added value. Already 30% of pork and 70% of poultry production is carried out by “specialised” commercial operations rather than traditional farms. Optimum development in this direction could only be achieved on the basis of the introduction of private ownership of land. The continuation of the tradition of redistribution within the village shows that they would be widespread opposition to this. Even if the government could successfully introduce it, as it has with urban housing, simply by decreeing that land belongs to those who currently farm it, the consolidation of land holdings, allowing, as it were, the emergence of a kulak class and, therefore, either the expulsion of millions from the land or their transformation into a rural proletariat, would constitute a major social convulsion.

If anything, it is even more difficult to estimate the development of the bourgeoisie within China than the development of the other classes. In 1990 there were 90,000 private firms and this had grown to 1.7 6 million by the turn of the century. (Story, page 192) According to Story, privately owned industry accounted for 16% of production and employed 81 million people in 1998 (Page 69) but this figure does not differentiate between Chinese-owned and foreign capital. Harvey gives the figure of 56.8 million employed in Chinese-owned private companies in 2002 with 42.7 million of these in urban areas. (Page 129) the increasing political weight of this class can be judged from the fact that 19.8% of the party are classified as businessmen, although this is likely to include managers as well as owners.

A further factor in trying to gauge the development of the Chinese bourgeoisie is the role of the Chinese diaspora which has been responsible for some 50% of “foreign” direct investment totalling $250 billion in the 1990s. Most of this funding until WTO accession was channelled via Hong Kong and, anecdotally, there is evidence of tensions between the “seven plus two", meaning the seven southern provinces plus the two special regions of Macau and Hong Kong, and Shanghai, the traditional financial and commercial capital of China. Naturally, the bourgeoisie of Taiwan, originally from the mainland, is a further complicating factor. On balance, this is not yet a bourgeoisie capable of generating an independent political leadership, while it will certainly have interests counterposed to those of the state, the maintenance of social order will continue to be a higher priority for the foreseeable future.

Appendix - GDP and growth rates

At the risk of stating the obvious, GDP is more a measure of economic activity than of production in the sense that it is calculated on the basis of the cost of purchasing all goods, services and investment within the national economy. With regard to understanding growth rates, in China, expressed as percentage GDP growth, it is particularly important to remember this because the restoration of capitalism has meant that whole parts of the economy which were previously simply allocated have now been “marketised” and so have to be paid for. Thus, in 1978, before the “reforms", basic health services were provided free to members of communes in the countryside while in the cities the “iron rice bowl” guaranteed housing, health, social services and education to the population. Today, all health services are cash-based and all housing was privatised in 1998 in the cities. In addition to the impact on GDP of including these factors, we also have to reckon with the resulting explosion of accountants, lawyers and estate agents whose activities also add to GDP because they didn’t previously exist.

A further consideration is that China’s estimated population of 1.3 billion is believed to grow at the rate of 0.5% per year (OECD, 2005) and just to cater for this steady increase in population it has been calculated that GDP has to grow by 6.5% per year. In rough and ready terms, therefore, growth in GDP per capita has to be calculated by subtracting that figure from the “headline” figures. With regard to those headline figures, the most common figure, and the one used by the OECD in its 2005 survey, is that the Chinese economy has grown by an average of 9.5% per year for the last 20 years. Such formulae give the impression of steady expansion but this is highly misleading: in 1985 GDP growth approached 16% while in 1991 it was below 4%. Two years later it was back up above 14% before declining steadily to about 6% in 1999. (Figures from CEIC, quoted by Chi Lo) In other words, the Chinese economy exhibits quite marked variations in growth rate. This is not to say that the economy has not grown, or that it hasn’t become a major global factor; this is a growing economy and nobody should have any doubt about its importance. However, politically, the fact that the economy is subject to considerable variations is also of greatest importance.

Above and beyond those considerations, we also have to question the validity of the figures themselves. In other countries, the statistics are calculated by formally independent institutions using sampling and survey techniques. In China, however, figures are still compiled by the ministries responsible for different sectors, a system inherited from the degenerate workers’ state. Jonathan Story quotes the Asian Development Bank as always deducting two points from China’s official growth rates (page 62). In a symposium organised by China Economic Review in December 2001, Thomas Rawski presented a range of contradictory data culled from Chinese statistics for the years 1997 and 1998 to illustrate their unreliability and the “intentional falsification of economic performance indicators". One set of figures illustrates the point, particularly if one remembers that these were the years of the East Asia crash when it was extremely important to China to maintain the appearance of economic stability and continued progress. Between 1997 and 2000, GDP reportedly grew by 24.7%, yet energy consumption, which normally moves roughly in parallel with GDP, declined by 12.8%.

Discussions of GDP figures, of course, have to take up the basis of comparison with the rest of the world and China’s current “standing” in the world’s economic league table. Leaving aside the problems of how to calculate China’s GDP at all, the issue here is how to compare the GDP of one country with another. Traditionally this has been done by expressing the country’s GDP in terms of an agreed currency, usually the US dollar. While this gives the appearance of a uniform measure for every country, the greatly varying range of costs in different countries necessarily makes it a fairly blunt instrument. To overcome this, the technique of calculating GDP in terms of “purchasing power parity", that take into account the realities of local labour costs etc, has been suggested.

Naturally, the effect of using purchasing power parities depends on the multiplier used to convert the GDP figure from one based on exchange rates. With regard to China, the most widely used converter is that applied by the World Bank which proposes a ratio of 4.5 times the GDP estimated at market exchange rates. That is clearly going to give a very much greater estimation of the size of the Chinese economy than the exchange-rate comparison. However, as last year’s OECD report makes clear, the World Bank multiplier is only one of several suggested and is based on research done “many years ago". In 1999, the OECD and China’s National Bureau of Statistics collaborated in a pilot study based on seven major cities and this concluded that a ratio of 2.0 would probably be more accurate, at least for urban areas. (OECD survey page 71)

The difficulty of estimating economic statistics does not only apply to China and to try to overcome it, which would be in the interests of capital internationally, the International Comparisons Project has been set up to establish a uniformity of methodology etc. China only agreed to participate in this project from 2004 and then only in 11 selected urban areas. The results of this first systematic survey are due to be published in 2007.

The purchasing power parity figures are also used in the calculation of one of the most famous statistics which is used to show how beneficial the capitalist restoration in China has been, the raising of 200 million peasants out of poverty. The figure itself is calculated on the basis of Chinese government statistics that show that in 1978 250 million people lived below “the poverty line” but that in 2003 only 29 million do. There are several points to be made about this; in 1978, poverty and hunger were widespread in China and we have no reason to challenge that, indeed, it had provided the impetus for the peasants of Anhui province to break out of the commune system and re-establish family farming in 1977, a move which immediately led to an increase in output and was taken up by Deng Xiaoping the following year. Nonetheless, it is difficult to see how a criterion of poverty based on money income can be applied retrospectively to a population for whom money transactions were not the norm. Certainly, there is every reason to believe that the money income of peasants at that time was extremely low but they didn’t have to pay for a lot of things that are now commodities.

In addition to that problem, the Chinese government’s definition of poverty, using the World Bank’s purchasing power parity converter, is a daily income of 67 US cents, whereas the UN and World Bank definition is a dollar a day. That suggests to me that 220 million people who are no longer below the Chinese poverty line may well still be below the World Bank’s definition. The World Bank itself estimates that 88 million people still fall below its criterion but, of course, if its conversion factor is indeed roughly double what it ought to be, as the OECD survey suggests, then that figure too will be a considerable underestimate. (The difference between the Chinese and the international definition of poverty is widely understood, these particular figures are taken from the OECD review of agricultural policies in China published in 2005, page 60)

None of us, of course, is in any position to construct better statistical series than those provided by the major institutions, Chinese or international. The importance of the discussion of the interpretation of figures is, firstly, that we need to understand their ideological significance so that we are able to counter the pro-restorationist conclusions that these figures are used to substantiate and, secondly, in order, as far as possible to understand the dynamics within Chinese society which provide the background to the class struggle in all its forms.

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