Peter Main
The vultures are beginning to circle around a weakening Chinese economy. At the World Economic Forum in Davos, George Soros, an asset fund manager who came to fame when his speculation against the pound forced it out of the European Exchange Rate Mechanism in 1992, predicted that it would be impossible for China to avoid “a hard landing”, that is, an uncontrolled downturn.
From now on, Soros declared, he would be “shorting” the Chinese currency, the yuan, and, indeed, other Asian currencies. What that means is that he will borrow huge sums of yuan, and other assets such as shares that are denominated in yuan, for a “short term”, say a month or two, but immediately sell them, probably for US dollars, at the official exchange rate, which he believes overestimates the real value of the yuan.
Why? Because he calculates that, before he has to repay the loan, the value of the yuan will have fallen significantly and the repayment will require only part, maybe 90 or 95 percent, of the dollars he bought. When you deal in billions, even a few percent adds up to a tidy profit.
The official response to Soros’ declaration was predictably indignant. The People’s Daily blustered, “if there is a chance to closely observe the life of ordinary Chinese people, one can find that there is no sign of any economic slowdown at all, and certainly no forewarning of any collapse”.
Absurd
In the foreign language edition, Mei Xinyu, a researcher with the Ministry of Commerce, said that Soros had “publicly declared a war against China”. Not to be outdone, Premier Li Keqiang observed that, “In recent days, there have been many international voices ‘shorting’ the Chinese economy, and some have even claimed that China’s slowdown is affecting the global economy – how absurd!”
Soros, and those like him who will no doubt follow his lead, does not take such decisions lightly. The People’s Daily may not see any signs of economic slowdown but practically everyone else does. Even official figures show that last year’s GDP growth was 6.9 percent, the lowest for more than two decades. Similarly, industrial profits fell 4.7 per cent in December from a year earlier, the seventh consecutive monthly fall.
Even more galling, especially for Li, are the figures presented by foreign analysts who base projections on other indicators, such as energy usage or railway tonnage. This technique is often called the “Keqiang Index” because, long before he was Premier, Li observed to foreign correspondents that he did not take much notice of official GDP figures but relied on such concrete material statistics.
A recent annual research report by state-owned energy giant PetroChina gives an example of what he meant, it showed that China’s crude oil demand expanded at a slow pace in 2015, with real oil consumption up by just 4.4 per cent from a year ago, while diesel use actually declined by 3.7 percent.
On the basis of such statistics, Goldman Sachs is predicting five percent growth in the coming year, not the “up to seven percent” announced by the government.
As to absurdity, Li’s own denial of any impact overseas from China’s downturn is surely only surpassed in that respect by his insistence that, “China is still a developing country, and it will remain at the initial stage of socialism for a long period of time. Those who allege that China has caused international market turmoil really over-estimate China”.
Rational levels
Obviously, Li’s assertions are as much aimed at influencing markets as are those of Soros but, nonetheless, there is evidence to support the argument that circumstances in China are not as dire as many commentators suggest. For example, by January 26, the benchmark Shanghai Index had sunk to 2,749.79, the lowest finish since early in December 2014. While that has been widely regarded as proof of a serious economic decline, it could be interpreted as a return to rational levels after the speculative boom that ended in June.
Helen Zhu, head of China equities at BlackRock, the world’s biggest asset manager, pointed out that, “The risks from excessive leverage have been digested by now. Thus we will see the A-share market back to ‘normalised’, with fewer ‘national team’ interventions”. Taking a similar line, Fang Xinghai, the vice chairman of China Securities Regulatory Commission, told the Davos meeting that “regulators planned to reduce intervention in the market, while letting it float ‘more freely’”.
Currency
For all that, despite the heat generated around its ups and downs, the stock exchange is not such an important factor in the Chinese economy. The same can clearly not be said about the currency and what exactly Beijing’s policy regarding its exchange rate might be has been puzzling analysts and investors ever since the September announcement that the yuan would be allowed greater “freedom” to respond to market forces. (For background, see http://www.fifthinternational.org/content/china-devaluation-promoting-gl… )
That was seen by many as a move to devalue the currency in a bid to stimulate the economy through increased exports. However, in the last year, China has used US$ 513 billion of its reserves to prevent any major depreciation in the yuan. This contradictory situation has added to the nervousness in markets already spooked by the prospect of a stronger dollar accelerating capital flight from “emerging markets” such as Brazil.
Such has been the concern over Beijing’s currency strategy that, at the Davos meeting, Christine Lagarde, the IMF’s managing director, publicly called for better communication with the markets. Subsequently, she requested, and received, a telephone call from Li himself in which, according to the published account, he assured her that “the Chinese government has no intention of devaluing its currency to help the export sector and has no plan to start a ‘trade war’”. He went on, “In fact, the yuan exchange rate has maintained basic stability against a basket of currencies, and there’s no basis for any continuous depreciation”.
That may well be the government’s strategic objective, Soros clearly calculates that it will not be easily reached, not without spending a great deal more of the $3.3 trillion still in China’s reserves. That carries the very real danger of even greater destabilisation because at some point the release of so much US currency would threaten its value and therefore prompt higher interest rates in the US, stifling an already faltering recovery there.
The lack of clarity on policy direction that Lagarde complained of is ultimately not caused by a weakness in communication. It reflects the contradictory pressures within China as a one party dictatorship, rooted in a bureaucracy that still has a powerful role in the economy, tries to move that economy towards a “free market” model. In this, it is pursuing the interests of the small, but growing, Chinese bourgeoisie that it has itself brought into existence since the dismantling of planning in the 1990s.
For millions of bureaucrats at all levels of government, management and state apparatus, allowing “market forces” to close down inefficient industry or force huge corporations and even banks into bankruptcy and closure is anathema. Yet that would be the outcome of the current leadership’s policy and so that policy is being obstructed, delayed and generally subverted throughout the country. The problem is compounded by the effects of the current economic slowdown as the largely credit-based boom of recent years comes to its inevitable end.
Bourgeoisie
An insight into the mindset of the Chinese bourgeoisie, who still rely on the “Communist Party” to pursue their interests but do not control it, and their increasing impatience with the slowness of “reforms” is provided by Wang Xiangwei, Chief Editor of the South China Morning Post. This was once the voice of the British colonial establishment but is now owned by the Alibaba Group whose founder and Chief Executive, Jack Ma, is probably the richest man in China.
In an editorial comment on January 28, he argued that Soros, and others like him, were “barking up the wrong tree”. Pundits who had predicted a hard landing for the Chinese economy in the past had consistently been proven wrong. Their concentration on long-standing weaknesses such as “shadow banking, overcapacity, troubled property markets and local government debt levels” was missing the most important point, he wrote. So, what should they concentrate on? “The progress of the reform agenda, which aims to transition the country to a full market economy. Unfortunately, the signs are not very encouraging, which should be a bigger worry.”
Wang’s concern is that “the overall reform drive has largely stalled. Certain key areas, like overhauling the state-owned sector, appear to have gone backwards”. This is the authentic voice of a capitalist class, well aware of its own interests but frustrated at its lack of an effective agency to secure them. He went on to lament the way that, “ominously, instead of pushing state-owned enterprises to function along market principles, some companies are clawing back previously introduced reform measures and incentives”.
What he has in mind is that, in some places, the anti-corruption campaign, initiated by Xi and Li’s faction of the leadership as a means to purge their opponents, is now being used against “pro-marketeers”. For example, the opponents of “reform” have been presenting managerial stock options and bonuses as the equivalent of corruption (as if!) and, therefore, withdrawing them, even after they have been paid in some cases. (See http://www.fifthinternational.org/content/china-factional-stalemate-beijing for the background to this conflict)
This appears to be a rearguard action by supporters of the party faction associated with Bo Xilai, whose defeat at the last Party Congress opened the way to the appointment of Xi and Li. It is testimony to the increasingly bitter struggle being waged within the bloated apparatus of China’s political system, which can only be exacerbated by the increasingly poor economic situation.
Working class
The bourgeoisie and its proxies within the party and state, however, are not the only force created by the restoration of capitalism. The working class, numbering perhaps 400 million, has also to be reckoned with. According to the Hong Kong-based China Labour Bulletin, in just the first week of the year there were 115 actions by groups of workers across China, almost all of them protesting at non-payment of wages, a clear sign of companies, many of them state-owned, unable to cope with the downturn. (See http://strikemap.clb.org.hk/strikes/en for full details)
The overwhelming majority of Chinese workers, estimated at 270 million, are classed as “migrants” because they are registered in rural areas but work away from home. Only ten percent of these workers have any entitlement to unemployment benefit so, if they are laid, off they face destitution, as do their families.
The urgency of the situation was emphasised by the first notice issued by the country’s cabinet, the State Council, in 2016, which urged local governments to make sure that migrant workers were paid fully and sufficiently. “The problem of wage arrears is still serious in some industries, especially construction and engineering, and even some government-invested projects are not paying migrant workers on time…[this has] caused public unrest here and there, endangering social stability”.
The majority of urban workers, 75 percent, now work for the “small and medium enterprises” that produce 60 percent of China’s GDP and are the basis of the new bourgeoisie. Like their bosses, the workers have no party of their own with which to fight for their interests. Unlike their bosses they cannot rely on the governing party to pursue those interests for them. The latest evidence of where the leadership’s sympathies lie is the decision to move to a taxation system based on VAT, in order to lighten the “burden” on entrepreneurs.
In the past, the period after the holidays to celebrate the Chinese New Year, which begins on February 8, has seen heightened protest and strike activity as returning workers find factories closed by bankrupt bosses who have fled. There is every reason to expect a similar pattern this year and it is within that turbulence that revolutionaries in China must fight for the formation of both independent trades unions and a workers’ party that can lead their struggles.
According to the Chinese zodiac, the coming year is the Year of the Monkey, traditionally a year of tumult and surprises, reflecting the character of this most mischievous of animals. That prediction may well come true in the next 12 months, but not because of any metaphysical symbol but the clash of very real material forces, the opposed classes of Chinese capitalism.