Will China’s bubble burst?

As tensions between China and the US continue to rise, HANNAH SELL reviews a recent book by former Bloomberg economist Thomas Orlik, looking at the character of China and perspectives for its economy.

China: The Bubble That Never Pops

By Thomas Orlik

Published by Oxford University Press, 2020, £23

Unlike many other aspects of US foreign policy, Biden’s election has not led to a fundamental change in direction when it comes to China. However, instead of Trump’s quixotic and inconsistent unilateral ramping up of tensions, Biden is attempting to build a coalition of global powers behind US imperialism, with the aim of putting up a firewall against the further rise of China.

Is that possible? What are the limits to the continued rise of China? One of the most useful recent books on the Chinese economy is Thomas Orlik’s China: The Bubble That Never Pops. Previously based in China for eleven years as Chief Asia Economist for Bloomberg, his book – while not written from a socialist point of view but that of Western capitalism – still provides a useful picture of the contradictory character of China, and how it relates to China’s economic growth in the past and, to some extent, the future.

The title of Orlik’s book might indicate that he thinks China’s growth is set to continue uninterrupted. This is not the case. Without putting a timescale on future crises he predicts they will come, quoting the late German capitalist economist Rudi Dornbusch that “crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine”.

He points, however, to some of the unique features of China that have allowed it to grow from 1989 when it’s “GDP was just 2.3% of the global total” to 15% in 2015, and to be predicted to reach 19% by 2024. While written from an opposite class standpoint, his book confirms the Committee for a Workers’ International (CWI) analysis of China.

Over a decade ago, in 2007-2008, there was a debate in the CWI on the character of the Chinese regime, including in the pages of Socialism Today. One view – mainly espoused by people who have since parted ways with the CWI – was that China had already become a ‘fully-fledged’ capitalist economy, which was completely integrated into the world capitalist economy. At that stage the leadership of the CWI argued that, while the direction of travel – towards a ‘normal’ capitalist regime – was obvious, it had not yet been fully completed and that China remained a transitional ‘hybrid’ regime.

Later, at our 2012 International Executive meeting, we reached agreement on a definition of China as a unique form of state capitalism. Nonetheless, beneath the common formula different approaches remained and are relevant to developments today. Given that even during the debate we were in agreement on China’s direction of travel, it could appear that these issues are unimportant. However, as we argued at the time, these seemingly secondary differences could have important consequences. We argued it would be wrong to base ourselves on a single perspective that China would develop on purely capitalist lines, uninterrupted by turns in the direction of the regime. On the contrary, the working class needed to be prepared for different scenarios including the possibility that, faced with a deep economic crisis, the regime could revert to much greater intervention in the economy in order to ensure its survival.

Since then two major crises of world capitalism, first in 2007-2008 and then the Covid catastrophe, have indeed led to a turn to greater economic intervention by the Chinese state. For example, from 2014, the share of industrial assets held by state firms ended a long decline and started to increase as a result of the regime giving them priority over private competitors. Further moves in that direction have taken place since, and more decisive ones are possible in the future. Overall, while Chinese capitalism has developed further than at the time of our debate, the Chinese state has also increased its grip, centralising power around Xi Jinping, and maintaining powerful levers with which to direct the economy, including those parts of it that are in private hands.

State intervention on the up

Orlik’s book recognises the unique character of China and how it has helped it to weather the economic storms. He concludes that “If underlying strengths, energy and imagination all fail, China’s policymakers can also fall back on the unusual resources of a Leninist party state. Chief among these is the ability to shift policy decisively, comprehensively, and without regard to procedural or legal niceties. That was on display in the response to the great financial crisis”. While the brutalChinese regimebears no resemblance whatsoever to genuine Leninism, which stood for the development of a planned economy under democratic workers’ control, it is nonetheless correct to point to the unique capacities of the Chinese state. As Orlik puts it, “China’s policymakers are not all-knowing or all-powerful. They do have an unusually extensive and powerful set of tools they can use to manage the economy and financial system”.

One specific example he gives is the way that the Chinese state was able to partially deal with the gigantic property bubble that developed in the first half of the last decade. He explains that “from 2011 to 2016, China built more than 10 million apartments a year. Demand averaged less than 8 million units. In the gap between these two numbers: ghost towns of empty property, cement shells of skyscrapers ruining the edge of major cities, and finished developments with no lights in sight”. Therefore “the consequence, if the market had been left to its own devices, would have to be a significant contraction in supply and fall in prices, as excess capacity was restored, but only at the expense of a crunching correction in GDP”.

However, “the market was not left to its own devices”. For example, in Guiyan, the capital of Guizhou province, “old properties were torn down, part of a massive programme of slum clearance”. In total 5% of the housing stock in Guiyan was demolished, with the residents paid compensation by the government which meant “slum residents could afford to move into one of the new skyscrapers”. Just to make sure that they did, compensation was not paid to residents but instead “paid directly to the developer once residents decided which apartment they wanted to occupy”. The same pattern was replicated across the country with the state banks providing funding for slum clearances.

Despite a couple of individual examples, Orlik does not really draw out the disruption and, for some at least, misery that resulted from such policies being implemented from above, with no democratic control, with the fundamental aim of deflating the housing bubble, rather than meeting the housing needs of the population. Nonetheless, he correctly recognises that the Chinese state was able to intervene to ameliorate the effects of the property bubble to an extent which would not be seen in a ‘normal’ capitalist country.

His book was obviously written before Covid, but China’s success to date in dealing with the pandemic – at least relative to most of the world – could be given as another example. China, the country where the pandemic began, had an official growth rate of 6.5% for 2020, while every other major economy suffered a serious contraction. Even if the 6.5% figure is inaccurate, it is clear that China was at the top of the league table for dealing with the virus. China contained the virus by introducing strict lockdowns where even small clusters of cases were found. The very repressive character of the state was a factor in the effectiveness of containment measures, but not the only one. Unlike Britain or the US, where the need to earn a living forced wide sections of the working class to ignore self-isolation rules, China had a policy of delivering food and goods to those who were having to isolate. That is not to suggest it worked well – the residents of one town ordered into lockdown had to take to social media to report they were starving due to lack of food deliveries – but it was still far more effective than measures taken by the major Western capitalist powers. The elimination of Covid in China, where it began, might have been possible, were it not for the fact that it is becoming endemic in the rest of the world.

Finance sector

Orlik concentrates a large part of the book on the Chinese finance sector. Events have developed since it was published but they confirm his analysis. He points out that the stimulus packages that the Chinese state implemented after the 2007-08 financial crisis, far bigger than those of other countries, led to incredibly high debt levels, so that by 2017 “for the country as a whole, government, corporate and household debt was 260% of GDP, as high as the US”. He goes on “close to four out of every ten yuan in national income” were “required for debt servicing”, higher than in the US. But while most Western commentators were predicting the bursting of the Chinese bubble Orlik points out the “important points” China has had in its favour. “As a nation, China saves almost half of its income; a controlled capital account means it’s difficult to move those savings offshore. As a result, the vast majority ends up in the domestic banking sector” which could therefore “count on a steady inflow of cheap domestic funding. Financial crises typically start when banks’ funding dries up. In China that was unlikely to happen”.

China’s banking system remains dominated by the big four state banks. However, Orlik points to the growing instability of the system as a result of private ‘Wealth Management Products’. These are offered by the financial tech companies like Ant Group and Tencent, and have sucked cash away from state banks by offering higher interest rates. By the end of 2016 they were “equal to about 19% of bank deposits”.

Orlik illustrates how the interests of the Chinese state can be threatened by this. He describes how “at the start of 2017, Alibaba’s Yuebao (part of the Ant Group) became the world’s largest money market fund, with 1.3 trillion yuan in assets under management. Those were funds that only a few years earlier, the banks would have counted as cheap deposits. Now they had to pay a premium to borrow them from Alibaba’s asset managers”.

He points to when the Anbang Insurance Group was effectively shut down by Chinese regulators in 2017. Why, he asks, did they “crack down so hard and so publicly”? His conclusion is that this was not – at least primarily – as a result of political infighting but because “Anbang was gaming China’s regulatory system, taking advantage of its status as an insurance firm to soak up cheap funding, and using that to go on an acquisition spree” and endangering economic stability. In other words the Chinese state was intervening in the privately-dominated parts of the finance sector in order to maintain the overall stability of the system and thereby defend its own power.

Since the book was published bigger steps have been taken to curb the financial tech companies. The Ant Group is now the biggest private company in China and the ninth largest in the world. Its stock market listing was planned for $37 billion at the end of 2020, which would have made it the worlds largest. It was dramatically withdrawn on the orders of the Chinese state, and since then Ant’s founder – Jack Ma – has largely disappeared from public view. His company has been ordered to restructure. The Chinese state is also demanding that Ant Group hands over its data to a state-controlled credit rating company. Other major tech finance companies have been ordered to do likewise.

These are important illustrations of the CWI’s analysis of the unique character of the Chinese state. Orlik’s book is a very useful description of how still, “the state dominates the economy, with the biggest banks and industrial firms following the direction of individual planners more than shareholders, and regulators intervening in markets before breakfast, lunch and dinner”. However, he does not attempt to analyse what that means for China’s character or future.

How did China get here?

Despite casually describing the Chinese state as ‘Leninist’, he recognises that today it is not comparable to the Soviet Union prior to 1990. He quotes the son of Deng Xiaoping (China’s leader from 1978-89) saying that his father thought that the last Soviet Union President Mikhail Gorbachev was “an idiot”. Orlik accurately sums up the reasons for Deng’s contempt being, “Gorbachev’s mistake: attempting political and economic reform – glasnost and perestroika – at the same time. As a result, he lost control of the levers of power, losing both political control and his ability to fix the economy. For China, Deng had chosen a different road, ensuring that the Communist Party maintained its monopoly on power and using that power to steer the path to a more efficient economy”.

Unlike the Soviet Union, where in 1917 a revolution led by the working class successfully overthrew capitalism and established a democratic workers’ state which was left isolated and then degenerated, the Chinese Communist party-state was deformed from its inception. Stalinism was the starting point for the Chinese regime. From the beginning, while defending the planned economy, the state was relatively independent, not subject to democratic checks by the working class.

Nonetheless the mighty 1949 revolution, based on the poor peasantry, overthrew landlordism and capitalism, leading to important gains for the working class and poor peasantry; particularly the ‘iron rice bowl’ (security of employment) plus education, health and welfare provisions provided by state-owned enterprises and village communes. Today that has been almost completely destroyed. While elements of it still formally exist, security of employment is smashed, and state education and healthcare is not available to the three hundred million migrant workers who have left their homes to find work, often with no choice but to do so because of the increased automation of agriculture destroying farming jobs. They are left having to pay for every aspect of life. Even if they travel back to their home village, where they still have the formal right to free public services, the services may not exist. From 2000 to 2015, nearly three-quarters of all rural primary schools – more than 300,000 in all – were permanently closed.

As far back as the 1970s the bureaucratic state under Deng began to take some steps towards introducing market relations, undermining the nationalised planned economy. Like Gorbachev in the Soviet Union, these were taken empirically to try to overcome the economic crisis that had developed under the bureaucracy’s criminal mismanagement of the planned economy. In the aftermath of the collapse of Stalinism in the Soviet Union and Eastern Europe, as capitalism appeared to reign triumphant globally, the powerful Chinese state machine went much further, introducing capitalist relations on an enormous scale and setting out to ‘breed’ a Chinese capitalist class. However, learning from the implosion that had taken place in Russia they strove to keep it under state direction. Even today the regime is not simply the repressive agent or servant of the – newly-formed, historically speaking – Chinese capitalist class. The Chinese state, a product of Maoism-Stalinism, has a large degree of autonomy in fostering and steering the development of capitalism in the way that best preserves its own power.

There is no historic analogy which fully applies to China today. However, Marx and Engels described the complex relationship between the state ‘superstructure’ and its economic foundations, and how, under certain conditions, a state power balancing between social classes (a ‘Bonapartist’ state) can for a period play an autonomous role in sponsoring the development of capitalist industry and fostering the development of a capitalist class. In Germany during the 1870s, for instance, Otto von Bismarck – based on the Prussian monarchist state, the army elite and the Junker landlords – promoted the development of capitalist forces as the necessary basis for German imperialism’s increased military and economic power.

Splits ahead

This situation cannot continue indefinitely. Up until now the developing capitalist class has largely accepted the dictates of the state which created it. However, it would be wrong to imagine that, for example, Communist Party membership cards will automatically prevent Jack Ma or others like him revolting at a certain stage against the restrictions put on them, and attempting to take full control of Chinese society, trying to mobilise the middle and working classes behind them with calls for ‘democracy’.

To date the relative success of the Chinese economy compared to Western capitalism has encouraged the Chinese capitalists to accept the status quo. In addition, both they and the Chinese state are aware that splits at the top could be a trigger for working-class revolt from below. Nonetheless, new economic crises, particularly if they lead – as they could – to further steps by the Chinese state to take more decisive measures against sections of the capitalist class, could lead to open conflict between the capitalists and a section of the state machine.

Orlik does not deal with prospects for class struggle developing, other than a telling aside that “the middle class has acquiesced to single-party rule as long as they keep getting richer”. Not only the middle class, but all classes in society, have ‘acquiesced’ to CP rule, and a gigantic increase in inequality, because, overall and in general, living standards have increased, even while enormous poverty remains. This has allowed the Chinese Communist Party, with over 90 million members, to maintain a significant social base.

Orlik also only sketches out some of the possible crises that could pop China’s bubble. He points to the danger of a financial crash, particularly given the destabilising role of the private finance sector. He also raises that ever increasing amounts of debt-fuelled investment are already needed to fuel decreasing levels of growth. In the past China has outrun its problems with rapid growth but, against the background of increased tariffs and world economic slowdown, “the same trick will be difficult to pull off again”.

One of the other important issues he raises is potential crisis as a result of China’s attempts to transform itself from being reliant on low-tech labour-intensive manufacturing and assembly to more advanced domestic industry, whilst at the same time developing its own domestic market.

He again points to the role of the state when it comes to trying to haul China up the value chain. He explains how, “ascending to the presidency in 2013, Xi Jinping inherited a state that was already tilting back toward industrial planning and an expanded role for the state in directing China’s technology catch-up. Once in power, he pushed even further in that direction”. Huge resources were put in. “In 2017 China spent $444 billion on research and development”. Only the US spent more. As a result, “there were more inventions. The number of triadic patents – patents deemed valuable enough to register in the US, Europe and Japan – by Chinese inventors rose from 87 in 2000 to 3,890 in 2016. That’s still considerably below 14,220 for the US, but the acceleration is impressive”.

Orlik’s focus is on the potentially partially negative consequences in succeeding in moving up the value chain. He points to how for Western capitalist countries over the last forty years, “advances in technology come hand in hand with a widening gap between rich and poor, often with wrenching consequences for harmony and political order” as increased productivity has resulted in fewer manufacturing workers, with more workers left unemployed or in low-paid service sector jobs. In China such a process would be taking place with a starting point of a still relatively limited domestic market. According to the World Bank in 2019 China’s GDP per capita was $16,092 per annum, compared to $62,530 for the US. The consumption share of Chinese GDP was just 2% higher in 2019 than it was in 2007. Its limited domestic market means it is still highly reliant on exports, so increased tariffs and barriers hit it hard.

Orlik does not discuss how far the Chinese state, faced with mass revolt as a result of this process, might take measures to try to limit the driving down of wages, shoring up its support among the working class via striking blows at the private sector.

Nor does he draw conclusions about how far China can succeed in getting to the top of the value chain in the face of US attempts to block it. China is the world’s second power, but it still lags way behind the US. At this stage five of the top six most valuable companies in the world remain American, while the top Chinese company comes in at seventh, and it only has two in the top twenty. The dollar remains the global reserve currency.

The weakness of China is demonstrated by its continued reliance on the US for semiconductors, vital to produce smartphones, computers, modern cars and much more. At this stage the equipment needed to produce them is a virtual US monopoly. Last year alone China had to import $350 billion worth of semiconductors. The state is desperately pumping money into developing a domestic semiconductor industry but as yet has a very limited capacity to produce the most advanced chips.

Global turmoil

Nonetheless, the US attempts to block the development of China are fraught with difficulty. The days where the US had overwhelming dominance on the global stage, as it did immediately after the collapse of the Soviet Union, are over. There is not automatic support for Biden’s position from other major Western powers. French President Macron, for example, said earlier this year that it would be counterproductive “to join altogether against China”, while German Chancellor Angela Merkel has declared she is against the “building of blocs”.

Fundamentally their hesitation stems from the high level of integration of the world economy, and the important role that China plays within it. Governments under pressure from the US to stop using Chinese products face a real dilemma. For example, over the last three years the US has run a campaign against Chinese company Huawei. Yet of the 170 countries that use its products only around a dozen have banned it so far.

China is also the world’s biggest creditor, having lent huge sums mainly to neo-colonial countries to fund Chinese-built infrastructure projects via the Belt and Road Initiative. It also holds around $1.1 trillion (4%) of US government debt, which selling could plunge the US into crisis, with severe consequences for the world economy, including China.

However, despite the clear dangers to the world economy as a whole to increased conflict with China it is clear that, in this era of capitalist crisis, declining US imperialism is impelled to continue in that direction in order to try and defend its interests against its nearest rival. The result will not be a short-term victory for one side, but rather a period of intensifying instability and conflict as the world’s great powers fight for dominance, but are incapable of decisively claiming it.

Against that background the Chinese regime will not be able to continue to weather all the coming storms. Whereas Chinese demand, albeit partially financed by the US treasury’s underwriting of the world’s financial system, acted as prop for the world economy in the 2007-08 great recession, and China has weathered the Covid crisis better than others, it is unlikely to cope so well with the next global crisis. The centralisation of power around Xi Jinping gives an impression of strength but could very quickly turn into its opposite as economic and social crisis develops. Then all the centrifugal forces between different regions of China, but above all between classes, would come to the fore.

The voice of the powerful Chinese working class has not yet made itself fully heard. The Chinese state is rightly terrified of the consequences of that changing. The crucial task for the working class will be to develop its own organisations – including further steps towards the development of independent trade unions and of a mass party of the working class, armed with a programme for the socialist transformation of society. This requires fighting for the nationalisation of the big private corporations and banks, combined with a programme of democratic workers’ control and management drawing together the state sector in a real socialist plan of production. The growth of China is a factor destabilising world capitalism; the growth of the Chinese working class will further the struggle for genuine democratic socialism.