Thanks to Will Brown for this.

China has stumbled on to the world stage like a nervous elephant. Rapid industrial growth means it is now the world’s greatest exporter, the biggest market for iron ore, copper and bauxite, and the largest holder of US government debt. This year it overtook the USA as the world’s biggest car market. Six months ago, with the world economy on its knees, what China said and did suddenly mattered very much. There is no evidence the Chinese leadership foresaw the crash any better than Wall Street or the City. But its response over the last 6 months has played a large part in an unexpectedly rapid recovery. House prices in the US and UK stopped falling in May, no major bank has collapsed for 6 months and the stock markets globally have risen 20% since March. It is unclear whether this recovery will be sustained – but China will certainly play a significant part in determining the worlds’ future.

The crash of the last 2 years has been comparable in scale and extent to the Wall Street Crash of 1929. Would a Great Depression follow? The response of the worlds’ governments has been very different this time. Central banks have poured money into tottering financial empires – in the 30’s they refused and were unable to stop waves of bank failures. In the 30’s; France, England and the USA were at loggerheads over trade and currency policy. Vicious tariff wars led to a collapse of world trade. This time round, despite sharp tensions, the policy of leading central banks has remained relatively coordinated and harmonious. And China, the new economic power, with an economy under significant state control, has launched a spectacular reflation.

Chinese growth has been a major part of the global recovery story. The Chinese economy stopped growing in the middle of last winter as millions were laid off from the export industries supplying the US and European markets. 20 million migrant workers lost their jobs in the export province of Guandong alone. The Chinese government responded with massive increase in lending by the countries’ state controlled banking sector. Incentives have been dished out for consumers to buy cars and kitchen appliances. And direct state spending kick-started the economy with massive public works on infra-structure projects –thousands of miles of new railways and roads and dozens of new airports.

This recovery has already lifted prices of raw materials like iron ore and copper which in turn has boosted the economies of Australia and Brazil, the beleaguered shipping industry and the stocks of giant miners Rio Tinto Zinc, Vale and BHP.

Workers fight riot cops

Despite the apparent success of the Chinese CP in dealing with the crisis, deep tensions and uncertainty cloud the picture. On July 27^th a Chinese steel executive was beaten to death by workers angered at the threat to their jobs by privatisation. The riot, in north east China, involved up to 30,000 workers of the Tonghua Iron and Steel works. The owner, Jilin province, wants to sell it to privately held Jianlong Group. An interim manager, Chen Guojun, sent in by Jianlong, infuriated employees by his high-handed manner and threats to lay off most of the staff. Human rights groups report that retired steel workers are paid only Rmb200 a month while Mr Chen was being paid Rmb3million annually. Thousands of irate workers surrounded Mr Chen in his office and beat him unconscious. They then battled riot police for several hours, preventing medical help reaching Mr Chen, who later died. Jianlong Group is owned by Zhang Zhixiang, China’s tenth richest capitalist with a fortune of $2.9billion. There have also been several reports of riots by migrant workers laid off unpaid from the export sector. And in July 200 people were reported killed in the Western province of Xinjiang in rioting between the Han and Uighur ethnic groups.

Western expectations that China will develop democratic structures as it industrialises have so far been disappointed. Unlike the former Soviet Union and Eastern Europe, the Chinese Communist Party retains a monopoly of political power. This is symbolised by rigid control of the Internet. The State supervises search engines. Government censors recently ordered a block on searches related to corruption in Namibia because it involved a company formerly run by the son of President Hu Jintao. Google has cut a deal and supplies a censored version of its search engine to China – Google.ch – which has 30% of the market. But there are deep reservations in the US Internet industry about colluding with such control, partly because it is regarded as a means of blocking US software exports. News of outbreaks of social unrest is limited with the Internet heavily censored and social networking sites such as Facebook and Twitter shut down when there is trouble. But such control doesn’t fit easily with an advanced, industrialised economy.

Domestic consumption

There are serious doubts about China’s ability to sustain growth and maintain social peace. The Chinese real estate market and the Shanghai stock market have roared ahead since March. The stock market is up 60% over 4 months. Over 100,000 new day traders have signed on every week to play the market. Many of the new loans made by the banks are considered to be of dubious quality. There are fears that much of the increased bank lending has simply been poured straight into the stock and housing market, leading to a new bubble. It is not clear that China’s domestic consumption will be strong enough to make up for the lost export trade.

Since the historic visit in Feb 1972 by Richard Nixon to China, the developing US/Chinese relationship has been critically important. The first bilateral meeting of the Obama administration was between officials of the two countries. The US is the largest market for Chinese exports. This has generated a huge Chinese surplus of $2,000 billion. China has used this money to buy US government bonds. Any hint that it might stop buying sees the dollar wobble. If China did stop, the US government would have to slash spending, the US economy would shrink and Americans will stop buying Chinese exports. Because of the humiliating collapse of US banking industry, US influence in Beijing has weakened. But the US needs to borrow more money than ever, selling government bonds to pay for the bail out of the bankrupt finance and car industry.

In the words of Eswar Prasad of the Brooking Institute: ‘The Chinese leadership understands very well that their economy is locked into a difficult and unhealthy embrace with the US and would like to tear themselves away from it. But much as they detest it, the embrace is only going to get tighter in the short run’.

With its enormous hoard of foreign exchange and increased international economic links, Chinese investment overseas has rocketed. The Bank of China, the world’s third largest, has offered mortgages to British borrowers that undercut established UK lenders. It is moving into a mortgage market starved of funds with mainline UK banks reluctant to lend money. Combined with its influence on HSBC, China will have a growing pre
sence in the UK economy. Since Lehman Bros collapsed, Chinese companies have gone on an unprecedented buying spree. They have bought $50billion dollars worth of foreign companies. 2/3rds of deals have been in mining or energy – Chinese companies have been buying foreign companies that control raw materials. Half have been in developed economies, half in developing economies. Though welcomed in much of the developing world as investors without an imperialist tradition, China is likely to use its influence to protect its assets as other exporters of capital have done before. Control of the Internet may become a technology it is tempted to export.

Dark clouds still loom over the world economy. As Gillian Tett points out in the Financial Times, the machine of international finance has re-assembled itself like Terminator 2 from the wreckage of the crash. The political clout of Wall Street and the City is busily undermining attempts to radically curb the power of international capital. Mega banks like HSBC, with 128 million customers,1/3^rd million employees and $20billion profit will not be easily controlled. These giant banks specialise in regulatory and tax arbitrage, bullying countries into competing for capital and jobs. And while the banks are trying to carry on as if nothing has happened, governments cannot maintain current spending levels for ever. The world’s industrial powers have written blank cheques to save their financial systems, none more so than the UK. We haven’t begun to start paying the price.

World’s ruling class

The limits of emergency government spending are being reached. The reform of the world financial system is yet to be agreed, let alone implemented. And while everyone knows China is centre stage, no one is sure what she will do next. The Copenhagen Climate Conference promises to be historic: will we see the embryo of a world government, a glimpse of a world under Chinese leadership or trans-national capital reasserting control? Is ‘the international community’, so talked about by world leaders, a euphemism for ‘the world’s ruling class’?

And the problem remains. Capitalism has, since 1650, delivered two things. It has delivered long run economic growth. This now appears to pose a threat to the eco system. Yet this growth has been repeatedly interrupted by bitter economic crisis. Which, if the last 2 years is any guide, pose a massive threat to a system that now embraces all humanity in webs of trans-national capital beamed by the Internet. It is far from clear that the Chinese CP will provide the transformation the world needs. Even if it can shut down Facebook.

Will Brown

Totterdown

7/9/09