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Intelligence Guidance: Week of July 26, 2009

Intelligence Guidance: Week of July 26, 2009

Chinese talks: China and the United States will hold strategic and economic talks in Washington this week in what could help define the direction of the countries’ bilateral relations under the Obama administration. This is the time for Beijing and Washington to lay it all out on the table, from climate change to North Korean antics to Uighur unrest. The economic talks are likely to be the most revealing, as both sides have bones of contention to pick about each other’s stimulus policies. China is concerned about the U.S. budget deficit and maintaining the value of its dollar holdings, while the United States is continuing to press China to boost its domestic demand and not rely on exports. We’ll also need to see how well the two sides align on discussions over carbon emissions and clean technology, as negotiations are bound to intensify in the lead-up to the December Copenhagen summit on climate change.

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Can China boost domestic consumption to offset falling exports?

They [the government] have been talking about this for years, talking about ‘re-balancing’ the economy, but it hasn’t happened. The gap between an overweight export sector and a malnourished internal market has just become more extreme. You don’t need to be a genius to work out why: Chinese people have too little spending power for this to become the main driver of the economy. All evidence indicates that social polarization has been on the rise since the late 1970s. In fact, as of 2006, 0.4 per cent of households in China own around 70 per cent of the wealth of the nation (Han Honggang 2009), and there were nearly 420,000 people whose personal wealth exceeded one million US dollars, whereas the Chinese farmers’ average annual income was as low as 2,762 yuan (Li Peilin et al. 2007). In 2007, China’s Gini Coefficient rose to 0.496 (Xinhua 17 January 2007) from 0.22 in 1978 (Adelman and Sunding 1987). Within three decades Chinese society has changed from one of the most egalitarian in the world to one of the least. This is what you get when, like the CCP, you base your economic policy on becoming a cheap-labour platform for low-cost goods with the generated wealth kept in the upper 1%. Today, consumption is falling, which again is no surprise because wages are being cut or frozen as the recession bites. Migrants have had to accept pay cuts of 100 yuan ($14.60) or more per month compared to what they were paid last year. The central government has told regions to freeze the minimum wage.

So workers are suffering an absolute reduction in wages, after years of relative decline. The share of wages in national income dropped from 53 percent in 1998 to 41 percent in 2007. Similar declines took place internationally, but nowhere was the fall as dramatic as in China. Given these facts, where is the growth in consumption going to come from?

The new stimulus measures will not reverse this trend. The main plank of the stimulus package is investment in infrastructure – to bailout the big companies. We’re in favour of better infrastructure, but because of corruption, mismanagement and regional rivalry, there’s going to be massive waste and duplication as the new projects are wheeled out. And only temporary ‘irregular’ jobs will be created. They’ll contract the work out to slave-drivers because this is cheaper – permanent staff are harder to get rid of again, they have certain rights.

Can the government stimulate its way out of crisis? What about the 4 trillion yuan ($580bn) package launched in November?


The biggest test of the stimulus measures is to what extent they create jobs. There will be some job creation from these measures, but not on the scale needed. Even when the economy was growing 10 percent a year, this only generated about 1 percent employment growth. Now, with growth maybe falling to half that rate, or worse, it’s clear that unemployment is going to explode, it’s happening already. The stimulus measures can only soften this to a limited extent.

Under the 4 trillion yuan package, the central government told the banks to lend more and this seems to be working. But this is another of those occasions where you have to look below the surface at what’s really happening. Firstly, a lot of the new lending – around a third – has been gambled away on the stock market. This says a lot about the parasitic, speculative role of the directors of the big state-owned companies who are the main recipients of this increased lending.

Secondly, many of these state-owned companies are not actually in great need of additional loans. They’re already sitting on bags of money – corporate savings are roughly equal to household savings in China, at about 23–24 percent of GDP. This is incredibly high by international standards, after all, most companies abroad are up to their necks in debt. Despite having ample capital reserves these state-owned companies – in steel, construction materials, motor vehicles and so on – have been scaling back on investment, firstly because of the collapse in demand and secondly because of falling profits. So, by pumping in more credit, the government is not actually solving anything. It is like an athlete using steroids – you get a short-term boost in performance but the long-term effects can actually be harmful. And this is being done in a very inefficient, corrupt way of course – no debate or discussion about where and what type of new projects are needed. There is no long-term vision or consideration for the environment.

China is now also seeing an explosion of public debt. If hidden liabilities are included in the picture, then China’s real gross public debt is now 65% of GDP, not the 18% widely quoted. This is on a similar level to France and Germany and significantly higher than the IMF’s recommended level of 50% for ‘developing countries’. I am not supporting the IMF’s arguments, I’m just pointing out the real debt picture in China is considerably worse than official figures would have us believe. In addition, to finance the stimulus measures local governments, which can no longer easily sell land to raise income, will for the first time be allowed to directly tap capital markets through the sale of bonds. So here you have the beginning of a local government debt problem – we can look at the U.S. today to see where this leads. We should remember that Japan started the 1990s with almost no government debt, but after five or six huge rounds of stimulus the interest payments on the debt alone swallowed 65% of all tax revenues.

What effect is the economic crisis likely to have on workers’ struggles and consciousness?

There will be huge changes and we’re already beginning to see this. The official media and the police agencies of the CCP are alarmed about the growing anti-capitalist mood, the growth in support for neo-Maoism, for socialist ideas, but even for liberal democratic groups like Charter 08 that support ‘real capitalism’. This is a new period and a lot of the old ideas and prejudices will be swept out.

But China is a complex, extremely stratified society, in which contradictory processes can occur among different sections of the population. Things rarely take the form of a single, uniform process. Previously, however, even with general dissatisfaction over inequality and worsening repression, the CCP had the economy as its ‘trump card’ – this is no longer the case. 2008 saw 120,000 ‘mass incidents’ which is more than double the level in 2004. The government – with good reason – is very worried about the coming year and the effects of the crisis. But having said this, the process will be uneven and contradictory. The taxi drivers’ strikes last year in more than ten cities were a great example of workers learning from and imitating each others’ experience. They also raised the right to build their own organisations. This idea will fuse into a tsunami in the coming years. The struggle of the textile workers in Baoding [in March-April 2009] is also extremely significant because of the experiences they have been through – privatisation, sackings, countless broken promises – some of these workers called for an all-China general strike!

But in the absence of an organised workers’ movement that can harness the anger out there, terroristic moods can also develop. To growing layers of poor and young people it seems ‘concrete’ – a way to get back at the corrupt rulers. Today, workers commit suicide, they jump from the roof, they set themselves on fire, as a desperate protest. It’s a small step from this to carry out acts of violence against individual capitalists or officials. The CCP leaders are very worried about events in Tibet and Xinjiang, that through the example of the oppressed minorities even Han Chinese youth will be inspired to make bombs or fight the police on an individual basis. It is a bankrupt strategy, because tyranny can only be defeated by a mass movement. But if workers are denied a collective voice, if their strikes are crushed, this can become a more common phenomenon.

What are the likely political effects of this crisis? Is the Communist Party’s tenure of office threatened? 

The short answer is yes, this is a life-threatening crisis for the CCP and its hold on power. In the past this party had deep roots in society, as the representative of a revolution that brought major social gains. But more recently, as it has attacked these gains, its main pillar of support apart from the ban on all organised opposition has been rapid economic growth. The global crisis has already seen governments collapse in Iceland, Latvia, Belgium and Hungary. The CCP will not fall from power so easily. It will not be a simple act, but more likely a process: deepening crisis and political paralysis, increasing splits and infighting at the top, sharper clashes between the centre and some of the provinces, and more erratic swings in policy. But this is a new period, an unprecedented period, which the regime already senses and dreads. For us, the decisive question is the organisation of the working class – workers must put their stamp on the events of the next period, build an independent labour movement and in this way draw support from other oppressed layers, the peasantry, the minorities.

We have seen ‘colour revolutions’ – massive upheavals in Ukraine, Georgia, Kyrgyzstan, and also in the Philippines, which was similar in character. But these movements only replaced one wing of the ruling elite with another wing, they did not alter the fundamental conditions of the masses. Such a development could also open up in China, but if the working class does not move into the social and political vacuum and show a way out, this could merely put an end to one phase of elite rule and open a new phase – the same elite in a different shape, perhaps more ‘democratic’, probably more nationalistic and militaristic.