China’s economy heading for ‘Japanese malaise’ • Inter-imperialist conflicts to escalate • Splits within the CCP regime
The following is a document discussed at the 2015 congress of the ISA’s China, Hong Kong and Taiwan section (formerly CWI). This appeared in our book Building the Socialist Alternative (published by chinaworker.info November 2015, 94 pages, available here) but has never previously been available online.
Marxist perspectives are not rigid prophecies, but an estimation of processes subject to continual change and modification based on the struggle of social forces. While certain details and statistical information have receded in importance, or even in some cases been disproved by subsequent events, the general outline presented in this document from six years ago has been vindicated. We believe this material with be useful to socialists wishing to understand more about the perspectives for the economy, the autocratic regime, and the struggles of workers and oppressed masses.
The Chinese dictatorship is facing its most serious crisis since the Deng Xiaoping era. The recent financial and stock market turmoil is only the beginning of a process that will shake China and the world in the coming years. The stock market crash that began in June, while spectacular, is only the latest symptom of a wider crisis: China’s massive debt-driven investment bubble – the largest ever seen – has burst. This has propelled the economy towards a Chinese version of the ‘Japanese disease’, something we have long warned of, meaning a prolonged period of debt-deflation which is likely to act as a gigantic brake on the economy.
Compared to the crisis of 1989, in which China experienced an incipient political revolution that could have toppled the one-party regime, today’s economic crisis is actually more serious. It marks the exhaustion of China’s debt-driven ‘state capitalist’ growth model. This coincides with a wider intractable crisis of global capitalism. China was hailed as the ‘saviour’ of global capitalism in 2008-9, when it launched unprecedented stimulus policies. This generated a global commodities boom and threw a lifeline to other regions especially the so-called emerging markets. But China is now paying the price for these ‘heroics’ as corporate debt and industrial overcapacity have soared to historic levels.
The CCP (Chinese Communist Party) regime completely misjudged the character of the 2008 crisis, seeing it as a re-run of the 1997 Asian crisis and previous global downturns, believing that after a relatively ‘short and sharp’ recession the major advanced economies would rebound and continue to provide markets and new sources of investment for China’s vast industrial machine. Beijing’s stimulus policies were intended to provide a breathing space before ‘business as usual’ resumed. But the world economy has not come close to full recovery mode and has instead become dependent upon extraordinary ‘life support’ measures (‘quantitative easing’ and money printing on a scale never before seen) in order to achieve lacklustre growth.
The political crisis within China’s ruling group, however, which became apparent in the turbulent succession struggle of Xi Jinping, and his subsequent aggressive push to recentralise political power, has not yet reached the same pitch as the late 1980s regime crisis. There are many reasons for this, the most important of which is the lack of any coherent opposition at this stage. While tensions are increasing within the CCP regime, it is a fact that all factions and cliques embrace the capitalist ‘market’ from which they and their families have grown incredibly rich. If we again compare with 1989, the situation was different, with a more reticent attitude towards capitalism among sections of the ruling elite at that time, which in turn reflected the mood of the masses, especially the working class. The most important factor that is missing today, as in the 1980s, is an organised workers’ movement. Despite this, political processes and consciousness can catch up rapidly with economic developments.
Stock market crash
In 2014, China’s periphery was shaken by some of the largest mass movements seen in decades: the Hong Kong Umbrella Movement and Taiwan’s Sunflower Movement. Both reflected massive disaffection especially among the younger generation. Formerly ‘stable’ Macau also witnessed its biggest anti-government protests alongside industrial action by casino workers. These movements should be seen as a storm warning for what is coming to China.
The stock market crash of the summer represented a new milestone in the developing crisis. This dealt a severe psychological blow to the aura of regime infallibility and Xi’s carefully cultivated strongman image. A CNN commentary expressed the fears of global capitalism: “The greatest concern over China’s market [crash] is not that it will create an economic crisis, but that it will create a political crisis for China’s leaders.”
The CCP regime has maintained itself in power by means of rapid economic growth in combination with repression. While it still has resources to distribute some concessions or favours to its main support base, the urban middle class and to a lesser extent the more affluent layers of the peasantry, even this ability can be endangered by an aggravation of the economic crisis. Therefore, notwithstanding the increasing use of state-sponsored nationalism as an ‘opiate’ to dull the economic pain, alongside greater repression, the ruling group desperately fears a recession. Yet this threat is growing. As the liberal commentator Zhang Lifan warned, “In the past people thought [the CCP] could continue governing and did not have strong opposition to it because they still had money in their pocket. Now the size of their pockets has shrunk.”
China is therefore entering a period of economic and political upheavals that could put the survival of the CCP regime on the line, and ultimately also the system of capitalism “with Chinese characteristics” that it manages. Rather than a single act this will be a protracted process of deepening crisis, political paralysis, an unravelling of state power, increasing splits and infighting at the top, conflicts between the centre and the provinces, and more erratic swings in policy.
We are at the threshold of a new period, an unprecedented period, which the regime already senses and dreads. Xi Jinping has on several occasions, especially in the context of the crackdown on official corruption, warned of “the end of the party and the end of the state.” This is the rationale for the extreme authoritarian policies he stands for, and his support for accelerated pro-market reforms, but both are ultimately doomed to fail. The current leaders have a sense that the clock is ticking for the CCP regime, but China’s recent financial and stock market turmoil, and Beijing’s chaotic and ineffective countermeasures, have also woken the global capitalists from a false sense of security that China’s leaders were in full control. “The incredible faith in the Chinese policymakers has been shaken,” noted Ruchir Sharma of Morgan Stanley.
China’s stock markets lost 42 percent of their value during an 11-week period from 12 June to the end of August. This was despite an unprecedented rescue operation by the government, pumping trillions of yuan into the sinking market. An estimated $5 trillion worth of share values were wiped out in this period, which is equivalent to more than 40 percent of China’s gross domestic product (GDP). China’s total losses from the summer meltdown dwarf those of the 1929 Wall Street crash (US$319 billion in today’s money) and 1987 crash (US$1 trillion).
For the regime and state finances this has been a hugely expensive debacle. The government recklessly promoted a stock market boom fuelled largely by credit. The proportion of margin debt (share purchases financed by bank loans) during China’s market surge was more than double what it was on Wall Street at the time of the 1929 crash, which many historians blame on high levels of margin debt.
A ferocious campaign in state media equated buying shares with patriotism and the ‘China Dream’. Stock market hysteria took hold, with reports of workers quitting their jobs and people selling their houses to become day traders. An average of 170,000 individual stock trading accounts were opened every day in the last weeks before the share bubble burst. This became known as the ‘Xi Jinping bull market’ after the president himself predicted the main stock index would hit the 10,000-level by the end of the year. It was widely, almost universally, believed that the market’s rise was guaranteed because the government willed it. Xi’s timing was impeccable; just a few weeks after he made his prophesy the market crashed (from 5,178 to today’s level of 3,092). The regime’s rescue measures failed to reverse the tide, much like the ancient Danish king Canute, except that the whole world was watching.
The stock markets themselves do not exercise a decisive influence over the real economy, although the connection is stronger than some commentators are claiming. They do offer a gauge – distorted by massive financial speculation – of the strength of the underlying economy. It is here that the real problem lies. This goes beyond the collapse of what is just the latest in a series of credit-driven bubbles fuelled by government policies (following gigantic bubbles in infrastructure investment, real estate and shadow banking). The economy is in the grip of a severe industrial crisis (overcapacity, factory closures, falling exports and deflation), a sharp drop in construction and demand for raw materials as the housing bubble deflates, and weakening household consumption (aggravated by stock market losses). This is the beginning of a Japanese-style deflationary crisis, with similar causes, but on an even bigger scale.
“One of the most unequal countries”
China is “one of the most unequal countries in the world,” according to a working paper published by the International Monetary Fund (IMF) this year. Using statistics for the full year 2014, we see that a billionaire was created every five days in China, and every five days 41,000 farmers were driven off their land, 22,000 people died from air pollution-related diseases, and 930 workers were killed in industrial accidents.
An incident earlier this year laid bare the explosive wealth gap in China when the son of China’s wealthiest man, property tycoon Wang Jianlin, posted pictures of his dog wearing two gold Apple watches. The watches cost around 250,000 yuan, which is more than seven year’s wages for a migrant worker. Amid the hue and cry the images generated, Wang senior apologised for his son’s antics and blamed this on his “Western education”.
China now has more billionaires than the US for the first time ever. According to Hurun Report, which produces annual rankings, there are 596 dollar billionaires in China, compared with 537 billionaires in the US. The Hurun Report even claimed that 2015 marked a ‘turning point’ and that China would increasingly pull ahead of the US in terms of the number of billionaires. The wealth of China’s super-rich is being felt globally, especially in luxury real estate markets. Barrasford and Bird Worldwide, a luxury property broker, reported in October that they had sold 19 castles in England, France and Scotland to Chinese buyers during 2015.
Under the pro-capitalist policies of the CCP dictatorship the share of GDP accruing to the capitalist elite has expanded dramatically at the expense of the working class and rural poor. The share of wages in GDP fell from 51.4 percent in 1995 to 42.4 percent in 2007, one of the sharpest declines in the world.
According to a study by UBS, average wages have risen by 80 percent since 2008. This is due in part to an increase in strike struggles but also to a fall in the size of China’s labour force by more than three million per year since 2012, leading to labour shortages in the main manufacturing hubs. But in real terms workers have gained nowhere near as much.
As a National Bureau of Statistics (NBS) survey from May last year showed the average wage for China’s migrant workers increased 13.9 percent in 2013, while per capita living expenses increased by 21.7 percent. This was mostly due to the rise in accommodation costs, which now account for around 50 percent of total living expenses for migrant workers. Based on NBS statistics for the same year, of China’s 270 million migrant workers, only 15.7 percent had a pension, 17.6 percent had medical insurance, and just 6.6 percent had maternity insurance.
The economic downturn has radically altered the picture. Real incomes are falling for many groups. In heavy industry, where output has been falling since late 2013, many workers are on ‘enforced holidays’ in plants reduced to working two or three days a week. This is especially the case in provinces dominated by heavy industry such as Liaoning, Jilin, Heilongjiang, Hebei, Inner Mongolia and Shanxi, These provinces, with a combined population of 241 million, suffered or were close to suffering a technical recession, defined as two quarters of negative growth, in the first half of 2015.
Shanxi, which is China’s top coal producer, saw a drop in GDP of 4.7 percent in the first half of 2015. In Hebei, which is China’s biggest steel producer and accounts for one in every nine tonnes of steel made worldwide, government plans to cut overcapacity mean that 600,000 steel-making jobs are under threat (almost double the European Union’s total steel workforce of 330,000). China’s steel output (currently around 800 million tonnes) has probably peaked and may eventually contract by 20 percent, similar to what happened in the US, Japan and Europe, according to the chairman of Baosteel, the country’s second-largest steel producer, Xu Lejiang.
The manufacturing sector has cut employment every month since February 2014. The Chinese Academy of Social Sciences predicted in a report from December 2014 that wage levels “won’t grow by the large extent seen in previous years.” In fact it is rather the problem of wage arrears that looms over workers in sectors such as mining, construction and manufacturing, where migrants constitute the overwhelming majority of the workforce. In 2014, the average unpaid wage of migrant workers was 9,511 yuan (around US$1,500), an increase of 1,392 yuan on the previous year.
This has resulted in a sharp upturn in strikes and industrial disputes. There have been 1,642 strikes during the first nine months of 2015, compared to 1,379 strikes in the full year 2014, and 656 in 2013 (source: China Labour Bulletin). Three quarters of strikes recorded in January-September 2015 (1,211) were over wage arrears.
At the same time, a wave of outsourcing and “temporary workers in permanent jobs” has spread throughout the labour market, far beyond the traditional sweatshop manufacturing sector into the state-owned enterprises (SOEs) and government sector, where workers previously enjoyed greater job security and better conditions.
There is a growing use of labour dispatch or agency workers, making nonsense of the labour law, which restricts their use. Already in 2011, the ACFTU estimated there were 60 million agency workers in China and of these, 37 million were in the government sector and SOEs. Copying the methods of the capitalists in Japan, South Korea, Taiwan and elsewhere, companies draft in these workers to do the same work with similar hours as regular employees, but on lower pay, with fewer benefits and less job security.
Services to the rescue?
The economic propaganda of the regime stresses the growth of the service sector, which it claims will offset the decline of heavy industry and manufacturing to become a new growth driver. This year, services for the first time account for over half of GDP, according to official data. Because services are more labour intensive than industry this sector has acted like a sponge to absorb those workers displaced by the industrial slowdown. This has been an important factor in the past two years in preventing a sharp rise in unemployment which would threaten political unrest. But, temporary factors aside, it is impossible for the service sector to power China’s economy forward while other sectors such as industry, the housing market and agriculture are declining.
Furthermore the growth of the service sector has been exaggerated in the official figures. The National Bureau of Statistics issued a news release on 15 September 2015, showing that the tertiary (services) sector generated 70.1 billion yuan less than previously estimated in 2014, an annual growth rate of 7.8 percent instead of 8.1 percent.
A Financial Times report showed that the record share of GDP growth from China’s services sector in the first half of 2015 was “due almost entirely to financial services. Excluding the financial sector, the tertiary sector accounted for a smaller share of GDP growth than it did in 2014”. The stock market crash in June put a stop to this rapid growth in financial services. As the Financial Times says, “The idea that growth in the services sector could remain stable, let alone accelerate, in the face of a wider slowdown was never realistic.” (Financial Times, 14 October 2015)
The regime’s propaganda also gives the impression that shifting the economic balance towards services is synonymous with technological advance. This is greatly exaggerated, when in fact the vast majority of service jobs are in old fashioned low-tech sectors: security guards, shop assistants, waiters and tour guides. Pay levels in the service sector are just 86 percent of the average across all sectors, while the working week is in some cases longer than in the traditional manufacturing sweatshops. In the hotel and catering sector, the average working week is 51.4 hours, while in residential services (guards and housing management) it is 49.4 hours. Staff turnover in the service sector is almost as high as in manufacturing, 20.2 percent per year as against 20.4 percent in manufacturing.
Even the internet and e-commerce sectors, widely held up as a ‘silver lining’, are experiencing difficulties. Tencent, Alibaba and Baidu, the dominant companies in the sector, have all announced a hiring freeze this year. Baidu cited the “current business situation” for its decision to freeze recruitment, while Jack Ma of Alibaba, which announced it would suspend recruitment until the end of 2015, said the company had grown “too quickly”.
The problems facing workers in the IT sector are shown by the high incidence of workers dying from overwork. According to a report in April 2015 by China Radio International 1,600 Chinese workers are dying through overwork every day. Long hours of overtime is the main reason. In the IT sector, the average age of death in such cases is 37.9, which is lower than in manufacturing.
Such conditions also explain why strikes and protests in the service sector are rising. Even in e-commerce there has been a rash of strikes recently. The e-commerce sector has grown explosively in the past couple of years as a result of favourable government policies. But this expansion has been at the expense of ‘bricks and mortar’ retailing, reflected in worsening overcapacity and soaring vacancy rates at an increasing number of ‘ghost’ shopping malls. More than half the world’s shopping centre construction is underway in China, with the number of malls increasing 40 percent in the past four years. This far outstrips the growth of retail spending. Local governments have pushed for new shopping malls to keep construction going and offset the slowdown in the housing market. This is seen as a way to support land sales, which are the biggest single source of local government revenue.
A clear example of the super-exploitation that is rife in the service sector is shown by a wave of taxi strikes that erupted in the first half of 2015. Drivers in more than 20 cities staged stoppages over fuel costs, licensing fees, and against ride-sharing apps like Uber and its Chinese competitors. Taxi drivers hire their vehicles for a monthly fee, which is 4,000 yuan in Beijing, while a driver’s income is around 6,000. “In the morning we work for the company, in the afternoon for the oil companies, and at midnight we work for ourselves,” is how one Beijing driver described their situation.
The capitalist counter-revolution in the workplaces and in society as a whole has inevitably hit women workers and minorities hardest of all. “The market economy has led to increased gender inequality since the 1990s,” noted feminist writer Lijia Zhang. According to official statistics urban women in China in 2010 earned on average 67.3 percent of men’s earnings, down from 78 percent in 1990.
The reversals in women’s rights and freedoms flows from the return of extreme capitalist inequality but this acquires an even more pernicious form as a result of the neo-confucian and authoritarian regression of the CCP regime. As the blogger Chang Ping has pointed out, “Patriarchy has made a comeback in Chinese society and is helping today to strengthen authoritarian rule.”
Women face discrimination in education, employment and property rights. 40 percent of women who have ever had a partner have experienced sexual or physical abuse (in reality the problem is more serious because most cases are not reported). Official propaganda, which rests heavily on traditional patriarchal values dating back to Confucius (551-479 BC), reinforces the problem of domestic violence. This reactionary ideology portrays women as inferior to men, a good woman/wife should be obedient, home is a private ‘domestic sphere’ where the man is the master. This makes women more reluctant to report cases of abuse and deters outsiders from intervening. Internationally, however, the regime is under pressure to be seen promoting gender equality. This it does for the sake of appearances so, for example, 30 percent of Chinese diplomats are women, but at the same time the regime persecutes women activists.
As a result of the one-child policy and the social and economic pressure favouring male children, 121 boys are born for every 100 girls, leaving a shortage of women and more than 13 million ‘surplus’ single men of marrying age. This has produced absurd but nonetheless huge social pressures upon young men to be ‘successful’ – to have a house, a car, a good wage, and ideally an urban hukou – in order to win a bride. Thus a woman becomes another ‘item’ to add to this impressive checklist. This has given rise to the derogatory term ‘naked wedding’, should a couple decide to get married without these things.
Discrimination against women in the job market is now widespread and quite open. A 2010 survey showed that 69 percent of employers set gender conditions when recruiting staff despite this being illegal. It is common for advertisements to specify that “only men need apply”, or only “attractive women”. This discrimination is if possible even worse on the factory floor than in the office. In a 2013 survey by the Sunflower Women Workers Centre, 70 percent of women factory workers in Guangzhou said they had suffered sexual harassment, with 32 percent reporting unwelcome physical contact and 25 percent receiving obscene phone calls or messages. Even the very limited relaxation of the one-child policy could actually blowback against women by increasing discrimination in the job market from employers who do not want to train or ‘subsidise’ women workers to have children.
Yet as the strike struggles of recent years show, women are anything but the servile ‘worker bees’ the employers imagine. Women factory workers have come to the fore in many strikes, not least the massive conflict in Dongguan at the footwear factories of Yue Yuen in 2014. This was China’s biggest strike in three decades, with women making up 70 percent of the workforce.
The explosive role that women can play in the struggle to change society was shown by the dictatorship’s sudden crackdown on five prominent feminist activists in March 2015, which triggered worldwide protests and a rare retreat by the state. These developments are grounds for great optimism, if China’s fledgling women’s movement links up and seeks common ground with the unfolding struggles of the working class, to fight for an alternative to capitalism and patriarchal dictatorship.
The bursting of China’s massive investment bubble and the sharp drop in internal demand, threaten to enormously complicate and even derail the radical reform programme or ‘economic transition’ that Xi Jinping and his government is committed to. This has been likened to performing a ‘heart transplant’ on China’s economy. Xi’s reform agenda is fundamentally identical to the neo-liberal ‘structural adjustment’ measures associated with the IMF and World Bank. These institutions have also been closely involved as advisors to the Chinese regime over economic policy.
The thrust of these policies is to shift the economic centre of gravity away from state-led investment, which under China’s current system has led to an unsustainable increase in debt and industrial overcapacity, towards consumer spending and services. This is to be achieved by giving a greater role to private and international capital, which – we are told – will allocate credit and investments more efficiently by observing the constraints of ‘market discipline’. It should be noted that this allegedly ‘more sustainable’ economic model has not saved the developed capitalist economies from recession and crisis.
Economic ‘rebalancing’ to develop a stronger consumer market has been agreed policy in Beijing for many years, long before the current leaders took office, but has stubbornly failed to materialise. As we have pointed out there are in-built factors in the nature of the Chinese state – the limits of the centre’s control over the regions (which Xi is trying to change), a fear of rapid change which breeds ‘gradualism’, and a complex web of crony-business factions which each defend their own ‘turf’ – combining to frustrate Beijing’s attempts to change the economic balance.
China’s household consumption as a share of GDP, at 37 percent in 2014, is very low even by the standards of other emerging markets such as Brazil (62.5 percent) and India (59 percent). Those who play down China’s economic difficulties point to increases in consumption as a ‘bright spot’ – it has grown faster than GDP in the past four years. But it is still below the level of the late 1990s, when China’s household consumption accounted for 46 percent of GDP.
Powerful structural factors act to suppress consumer demand in China. This is due to the super-exploitation of the working class under a process of primitive capitalist accumulation. The working class does not earn enough in wages to support a consumer-driven economy. Financial speculation in the housing market, encouraged to create new profits for the corporate sector as overcapacity has crippled profitability in their core operations, have further cut into workers’ spending power by driving accommodation costs to extreme levels. Following the social counter-revolution of the past three decades, which smashed the ‘iron rice bowl’ of the Mao era, China’s welfare safety net is miniscule in comparison to the needs of its population. This produces one of the world’s highest savings rates (an average of 30 percent of disposable household income), which is needed to provide for retirement, medical insurance, education and housing costs.
These problems are amplified by the discriminatory hukou system, where promised reforms have also stubbornly failed to materialise. This is largely due to the distressed state of local government finances, as it is the local governments that will pick up the bill if rural migrants are fully included in urban welfare programmes. To overcome these and other structural impediments by the year 2020, as Xi’s ‘transition’ agenda envisages, is extremely unlikely. This is not least because the bitter economic medicine of Xi and Premier Li Keqiang risks triggering a recession, which the regime rightly fears could become the catalyst for mass unrest.
The Economist magazine compared China’s economy to the antique penny-farthing bicycle, because of the disparity between the ‘big wheel’ of investment and the ‘small wheel’ of consumption in the composition of the economy. The danger with the regime’s economic rebalancing is that scaling back on investment will translate into lower demand meaning that the misshapen bicycle could tip over. As the Financial Times (14 October 2015) put it, “The issue facing Beijing is that the problems associated with China’s old economic model have come to a head before new growth drivers have been developed.”
The government’s problems are exacerbated by deflation, which cancels out the stimulus effect of monetary easing including cuts in interest rates, and a liquidity squeeze as capital flows overseas reflecting the capitalists’ loss of confidence in the Chinese economy. This is a dangerous environment in which to pursue a ‘transition’ agenda that is itself hugely deflationary.
The struggle within the regime over economic policy is about how quickly to pursue restructuring (downsizing the big wheel) given the concomitant risk of a further collapse in demand (the small wheel). There is a split between those urging faster reform, and those for backpedalling into more and bigger state-led stimulus measures, despite the risk of an even bigger debt overhang at a later stage. So Beijing’s economic policies zigzag between these two positions. Rather than the bold reform that Xi and Li have talked about, the government is muddling through, with sporadic bursts in one direction (reform) and then the other (more stimulus).
The internal struggle over policy is also reflected in the debate over whether to abandon the practise of setting annual GDP targets. Wang Jianlin, the property billionaire, is one of many who argue that Beijing should not set a target. What Wang and his co-thinkers actually mean is that the government should prioritise audacious reform even at the price of lower growth, rather than continually looking over its shoulder at the GDP numbers. Premier Li Keqiang, allied himself with this camp when he said ahead of the Central Committee’s Fifth Plenum in October that the regime would not “fight to the death” to defend the GDP target.
Finance Minister Lou Jiwei, one of the most openly neo-liberal top officials, issued an unusually public warning in April saying China had a “50-50 chance” of sliding into the middle-income trap in the next five to 10 years. Lou’s message was the need to push ahead with the capitalist reform agenda including a more radical shake-up of labour laws to make it easier for bosses to fire workers, and further and more rapid liberalisation of the financial system.
The concept of the middle-income trap comes from the World Bank, a traditional arm of US foreign policy. It argues that when a country attains a certain level of income its former growth drivers of labour-intensive manufacturing and exports lose competitiveness because of rising labour costs, so it must upgrade towards higher productivity (automation), innovation, technology and services.
Hiding behind this at first sight technical makeover is in fact a political agenda of ferocious attacks on jobs and job security, massive cutbacks in the public sector and more privatisations in order to create new profitable openings for capital. Yet if we look at economies that have ‘successfully’ escaped the middle-income trap – Japan, Taiwan, South Korea and Hong Kong for example – we see societies with massive social and economic problems, a widening wealth gap, surging debt levels, and a lack of decent jobs and housing for the younger generation. Another country that ‘successfully’ escaped the middle-income trap is Greece, which has since seen its GDP collapse by more than 26 percent during the recent crisis.
So, what is the driving force behind Xi’s ‘transition’ agenda? Certainly it is not a question of ideology, no matter how readily government spokesmen mouth neo-liberal jargon. China’s leaders are ‘pragmatic’ to a fault, but in their struggle to stay in power they are driven by merciless economic pressure – the pressure of a debt time bomb that unless defused raises the spectre of financial collapse with revolutionary upheavals as a result.
The economy’s addiction to debt, which has increased fourfold since 2007 (from US$7 trillion to US$28 trillion), coincides with similar debt-driven investment and asset bubbles throughout Asia in the same period. This process was fuelled by the unprecedented monetary expansion undertaken by the US and other central banks to prevent an economic collapse in the aftermath of the 2008 financial crisis.
In China’s case this took an extreme form when its giant stimulus plan, announced in late 2008, span out of control. Banks, SOEs and local governments took this as a signal to engage in furious unauthorised property speculation financed from a seemingly unlimited pool of state credit. Corporate debt, at 160 percent of GDP, is now higher than in the US. A study by the IMF examining 43 countries over 50 years, found just four cases where a similar scale of credit growth had occurred as in China post-2007, and within three years of their boom period, all four countries suffered a banking crisis.
“The economy is more distorted and imbalanced than [it was during] the Great Leap Forward,” stated Ha Jiming, who is the China vice-chairman of Goldman Sachs. This viewpoint, comparing the situation to Mao’s ill-fated industrialisation drive of the late 1950s, is common among Chinese economists. This also explains the regime’s reticence even in the face of a sharp deterioration in economic growth to resort to a similar grand stimulus approach.
“Exporter of recession risk”
Other governments are conveniently blaming the current weakness in the global economy on China. No ruling class is willing to admit that its own system and policies have caused the crisis, and this includes Beijing, and therefore this type of blame game helps to misdirect public anger. The truth is that China’s unfolding crisis and the crisis of global capitalism are inextricably linked and it is impossible to fully understand them if we view them separately. China’s current predicament is a result of the global crisis in 2008 and the measures Beijing took to try to escape that crisis.
There are also similarities between the situation today and the first phase of the Asian Crisis of 1997, which brought down currencies and governments around the region and plunged millions back into absolute poverty. But China at that time, especially by its refusal to devalue the yuan as other Asian currencies tumbled, acted as an ‘anchor of stability’ within the region. With today’s economic turmoil, China has instead become a destabilising force for Asian and global capitalism. And China’s economy has a far greater impact on the global economy than the Asian ‘tiger’ economies did in the 1990s. Sharma, of Morgan Stanley, describes China as the “critical link” needed for the global economy to achieve healthy growth.
This is because of the size and connectivity of the Chinese economy, which has become the beating heart of an Asia-wide production chain and the global commodities trade. China accounted for 13.4 percent of global GDP in 2014 (or 16 per cent by the purchasing power parity measure) and has accounted for more than one-third of global GDP growth over the past seven years. China consumes 55 percent of the world’s iron ore, over 50 percent of its nickel and aluminium, and 45 percent of its copper and zinc.
Already, even with an official Chinese growth rate of 7 percent, although it is more realistically around 2 to 3 percent, many of China’s key trading partners and commodity suppliers – from Brazil to South Africa – are experiencing a ‘hard landing’ or recession. “We have been affected by China’s slowdown. About 19,000 jobs in the mining industry are at risk,” said Ngoako Ramatlhodi, South Africa’s minister of mineral resources. Even the 50 percent fall in global milk prices, which has led to a spate of suicides among New Zealand dairy farmers, is partly due to a falloff in Chinese demand after years of explosive growth. The big falls on global stock markets in the summer reflected the fear of the capitalists internationally that China is now an “exporter of recession risk” as Britain’s Financial Times declared.
Maersk, the world’s largest container shipping line, this year cut almost one-fifth of its workforce as a result of the downturn in Chinese and global trade. “What went up with China, went down with China,” said Maersk’s chief executive Soren Skou. China’s total trade (exports and imports) fell by 6.9 percent during the first half of 2015. This was far below Beijing’s official target for growth of “around 6 percent” and means the target is likely to be missed for a fourth consecutive year.
Latin America, Australia and other commodity exporters have experienced a “re-primarisation” of their economies, with a contraction of their manufacturing base and dependence on raw materials exports increasing. Today, driven by Chinese demand, raw materials represent more than 60 percent of Latin America’s exports, compared to 44 percent at the start of the century. These economies are now feeling the full impact of the Chinese downturn.
But conversely, China is also more dependent on the global capitalist economy than it was even a decade ago. The loose money policies of the US Federal Reserve during the past seven years, of ‘quantitative easing’ and zero interest rates, resulted in at least US$4 trillion of speculative capital flooding into Asia and other emerging markets in the chase for higher returns.
This tidal wave of speculative ‘hot money’ pushed up local stock markets, real estate and commodity prices. But now, on the back of China’s reduced demand for commodities and the planned ‘normalisation’ of monetary policy in the US, these capital flows are moving in the opposite direction, dragging currencies and economic growth rates downwards. Millions of workers have lost their jobs as official unemployment in emerging markets has risen from 5.2 percent to 5.7 percent since the start of the year.
The capitalist class globally fears that China, the biggest and most decisive emerging market, is being sucked into this malaise. Despite their upbeat speeches this fear is shared by China’s leaders. Reflecting the interdependence of the global economy, the US Federal Reserve postponed its long-planned interest rate increase in September 2015. Yellen, the Fed’s chairman, mentioned “China” six times and “global” ten times at her press conference to explain the decision. US financial and monetary policies have had a profound effect on China’s economy and this is a major reason why the regime has placed so much importance on yuan internationalisation and joining the IMF’s basket of reserve currencies (the so-called ‘SDR’), to gain greater control over monetary policy, which is currently subservient to the power of the US dollar.
Capital “voting with their wallets!”
China is suffering record levels of capital flight to the ‘safety’ of the US and dollar-based assets. From the second quarter of 2014 until the present, China saw capital outflows of US$787 billion, a staggering level. By comparison, China’s mega stimulus package launched in 2008 was worth ‘only’ US$586 billion. “This is possibly the biggest capital flight in absolute and relative terms that the world has seen in the past three decades,” says the economist Andy Xie. The pace of capital outflows has further accelerated since the central bank’s botched ‘mini-devaluation’ of 11 August. An estimated US$141 billion left China in August 2015, topping the previous record of $124 billion in July.
Beijing’s change to the exchange rate mechanism was not primarily intended as a support for China’s hard-hit export sector, but to comply with the IMF’s criteria for a “freely usable” currency. However, if the yuan is accepted into the IMF’s Special Drawing Rights (SDR) as now seems likely, becoming an ‘official’ global reserve currency, this could be followed by a more significant devaluation, of 10 percent or more, in an attempt to defuse deflationary pressures within the Chinese economy. Currency devaluation, by raising the cost of imports including commodities, generates inflation.
China’s bid to be included in the IMF’s Special Drawing Rights, a basket of currencies currently comprised of the dollar, yen, euro and pound, is a key element in Beijing’s plan to speed up liberalisation of its financial markets. It sees this as a solution, based on increased demand for the yuan internationally, to its debt and overcapacity nightmare, by being able to tap overseas capital markets and massively expand the use of yuan-denominated securities and debt.
The August ‘devaluation’ was also a failed attempt to stem capital outflows, which are draining liquidity from the economy and cancelling out the central bank’s attempts to inject monetary stimulus. The People’s Bank of China (PBoC) has made several cuts to the so-called ‘RRR’ or reserve ratio requirement to increase liquidity in the banking system but this has so far had a limited effect on the domestic economy as more capital flows overseas. The country’s moneyed elite is not buying into Xi’s ‘China Dream’ – but rather ‘voting with their wallets’ to pursue more profitable dreams elsewhere. Rather than fix the problem the central bank’s currency ‘adjustment’ made it worse.
Under the new mechanism, the PBoC is spending a fortune – around US$10 billion every day – to prevent the currency from falling, which risks unleashing even greater capital flight. Contrary therefore to the claims of entrenched ‘China bashers’ in the US Congress, a freer yuan under today’s economic conditions is likely to fall, not rise, in relation to the dollar. China’s famed ‘war chest’ of foreign exchange reserves (formerly but no longer the world’s largest) has shrunk from a peak of over US$4 trillion last year, to US$3.56 trillion, and according to Citigroup will fall to US$3.3 trillion by the end of this year if the central bank’s support for the yuan continues at the current rate.
Should China’s foreign exchange reserves, vast as they are, deplete further then new policy shifts by Beijing are inevitable. This is not just about the currency and balance of payments, but also about the threat posed to the financial system. The regime has begun to tighten its capital controls – which are already ‘watertight’ in theory. To completely clamp down on capital flows however would mean abandonment, even if ‘temporarily’, of Xi’s reform agenda. Such are the stakes facing the Chinese regime.
When Beijing’s mega stimulus package was launched at the end of 2008, we warned “This points to a Japanese scenario of ballooning public debt in coming years that the working class will be asked to pay for.” Japan was the original capitalist ‘miracle economy’ – achieving a fourfold increase in GDP in the fifteen years from 1958 to 1973, much as China has done this century, and building a world-beating export machine from the ruins of war.
The collapse of credit-driven financial asset and property bubbles in the early 1990s pushed the Japanese economy into a prolonged period of stagnation and deflation. The average GDP growth rate for the decade 2001 to 2010 was 0.75 percent annually, compared to almost 4 percent from 1981 to 1990. Interest repayments on its monster debt consume 43 percent of the Japanese government’s tax revenues.
Like Japan, the Chinese regime faces the dilemma of either allowing indebted companies and banking institutions to default and declare bankruptcy, including $8 trillion tied up in dubious shadow banking investments, or – as it has so far done – stage a series of bailout operations, under various guises, for fear that defaults could escalate into a systemic risk to the financial system. This fear is also, as admitted by Xi and Li, the main reason for the stock market rescue mission of recent months, because banks and SOEs had also become heavily involved in the margin trading frenzy and other speculative practises leaving them exposed to huge losses.
The need to continually fund rollovers of old debts has reduced China’s banking system to a state of dysfunction where it cannot channel credit into productive parts of the economy. According to Chen Long, an economist at the Bank of Dongguan, nearly half of total social financing (a measurement of total credit supplied to the economy) is now used to pay interest on existing debt. Banks do not want to see defaults or a rise in bad debts, so they continue to extend new credit to struggling SOEs and local government entities, rather than lend to those sectors pinpointed by the government reforms. Despite the central bank’s interest rate cuts and other credit easing policies, the banks are effectively ‘on strike’. This is a creeping ‘zombification’ of the economy as happened in Japan. The problem is expressed in one particularly troublesome statistic: Today each yuan of new credit only generates 0.2 yuan of GDP, whereas prior to 2008, each yuan of new credit generated around 0.8 yuan of GDP.
If the Chinese economy is poised to follow Japan’s trajectory, or a downshift from the 10 percent GDP growth rate of the recent past to growth of around 3 percent over several years, this would impose immense social and economic pressures on what is a much poorer and more socially fragmented society than Japan’s.
This is not so much a discussion about the short-term economic perspectives – of whether a soft or hard landing is on the cards. Much evidence suggests that despite Beijing’s denials a hard landing has already occurred, certainly in China’s industrial heartlands, which are experiencing an ‘economic winter’. The Chinese regime is notorious for manipulating its economic data for political purposes and especially the closely watched GDP figures. International analysts are engaged in a furious debate about how false the figures are.
The comparison to Japan, however, is about the longer-term perspective, in the context of which there can be short bursts of growth as Japan has also experienced over the past twenty years, but where the enormous build-up of bad loans, China’s historically unprecedented levels of overcapacity, and the creation of ‘zombified’ companies, banks, and now even a ‘zombified’ stock market that requires government ‘life support’, weigh like an incubus on the future development of the economy.
“China appears to be more or less slowly entering a debt-deflation trap,” said Liu Li-Gang, chief economist for greater China at ANZ Bank in Hong Kong. Such predictions, referring to the Japanese experience, are gaining ground among capitalist economists. Indeed, some commentators now cite this as an optimistic outcome. “If the Chinese government is able to manage a Lost Decade [like Japan] with very low growth – or no growth – without an economic crisis, it will be a policy achievement,” said Yale professor Zhiwu Chen, a former financial advisor to the Chinese government.
Every year there are more than 100,000 ‘mass incidents’ – riots, strikes and rural protests – but these are localised and only occasionally do they attempt to link-up from one locality to another, although this is increasing especially through the use of social media. Most workers’ protests focus exclusively on economic demands. Land protests or anti-pollution protests similarly tend to focus on a ‘single issue’, over which mass anger boils over, but without generalising this into a wider critique of the whole system. This is for many reasons including a fear of repression and a feeling that the government is just too powerful to confront. Others have not yet drawn the conclusion that the central leaders are as thoroughly corrupted as their local representatives.
A crucial factor is that most struggles are of short duration; the regime’s playbook dictates that they should be quickly nipped in the bud (through a mixture of concessions and repression). This limits the scope for political ideas and strategies to be discussed collectively. Political consciousness develops exponentially – the longer the struggle, the more profound are the leaps in consciousness, and that includes lessons carried over from previous rounds of struggle. An analysis published in in Legal Daily (Fazhi ribao) in 2013, found that 75 percent of ‘mass incidents’ lasted for only one day, and a further 20 percent for up to one week. Only 4.4 percent of struggles lasted longer than one week.
During the epic 2011 struggle in Wukan village, Guangdong province, against land grabs by a corrupt clique of local CCP leaders and property developers, there were some banners proclaiming “Long Live the Communist Party” and one that stated, “This is not an uprising!” Yet that is precisely what it was, albeit in one local community. The youth of Wukan especially organised to keep out the riot police, expel the local CPP committee, and even undertake security patrols.
In Urumqi in July of 2009, the first wave of protests by Uighur Muslim youth, protesting the killings of Uighur migrants in Guangdong, marched under the Chinese national flag. Unfortunately this did not afford them any protection from the state forces whose panicky, unnecessarily brutal crackdown triggered the worst outbreak of inter-ethnic riots and killings seen in the region in decades.
The similarities in these very different struggles offer a glimpse of political consciousness at this stage, which is often characterised by appeals for ‘justice’, for the reversal of a ‘bad ruling’, or for the central authorities to punish corrupt local rulers. While political interaction under a repressive dictatorship is vastly different when compared to bourgeois democracies, there are still some parallels with the ‘anti-party’ and ‘anti-political’ moods that have become a common feature of protest movements internationally at the current stage of development.
A dangerous environment
Pollution-related protests have also increased in size and frequency in China, more than doubling in the past three years. Tens of thousands in at least seven cities around China have marched against proposed ‘PX’ petrochemical plants, in several cases forcing local governments to cancel their plans. In June, the ‘baton’ of anti-PX protest was passed to Jinshan, an industrial district of Shanghai, where cancer rates are already high. “The level of trust that we have in the government is very low,” one woman told Reuters, as tens of thousands took part in daily demonstrations that continued for a week. Some participants compared the Jinshan protests to Hong Kong’s Umbrella movement.
When Premier Li declared ‘war on pollution’ in early 2014, this reflected the enormous pressure the regime is now under, as public anxiety over urban air pollution threatens to stoke social unrest. China’s air pollution now kills more people than smoking, according to a 2014 study by Greenpeace and Peking University. The study found a 0.9 percent premature death rate caused by ‘PM2.5’ – small airborne pollutants – compared to 0.7 percent from smoking cigarettes. Beijing’s mayor even admitted that pollution has made the city “unliveable” – yet Beijing does not even rank in the top ten most polluted cities in China.
The shocking documentary film about pollution, ‘Under the Dome’ by TV journalist Chai Jing, illustrates just how explosive the mood on this issue can become. The film which was released online, and which was initially approved by the authorities because its message included support for privatisation and ‘market solutions’, was viewed 200 million times in the first week – at which point it was banned by the government!
Wave after wave of food safety scandals – from toxic milk powder to expired ‘zombie meat’ – have entered into mass consciousness, raising fundamental questions about the economic system, government, and the direction society is heading in. In a China Youth Daily poll earlier this year, more than 77 percent said food safety was “the most important quality of life issue,” with pollution a close second. Meanwhile, the cocooned and corrupt elite has exclusive sources of fresh vegetables and organic products grown on farms that produce only for them.
The gigantic explosions in Tianjin, on 12 August, represented “China’s Katrina” in the view of economist Anne Stevenson-Yang, “an obvious symbol of corruption and incompetence.” Katrina, the 2005 hurricane that devastated New Orleans, triggered a major political backlash against the Bush government. The blasts at a chemical warehouse in Tianjin, the world’s fourth largest port, damaged 17,000 homes, port buildings, warehouses and other buildings and killed over 160 people.
Massive corruption and illegality lay behind the disaster, with a storage facility for dangerous chemicals sited close to residential buildings in violation of industrial safety laws. Heroic but under-resourced and poorly trained ‘contract’ firefighters, who arrived before the official fire department crews, aggravated the disaster by tackling the blaze with water instead of foam. “No one told them the fire involved chemicals,” one firefighter told the press.
Almost 100 mostly young firefighters died in the Tianjin disaster, which is the worst in the history of China’s fire brigades. They were described as martyrs by Li Keqiang, who promised that all the victims’ families would get equal compensation regardless of whether their sons served as ‘in-the-system’ or as outsourced ‘contract’ firefighters. Equal in death, perhaps, but not equal in life! The Premier avoided the issue of why there is a huge gap in training, pay, job security, and benefits, between the different groups. China has almost as many contract firefighters (113,110) as the total public security ministry firefighters (130,000), a result of neo-liberal cost cutting and outsourcing that increases profits but endangers lives.
The workers’ movement
The key force to transform the political situation is the working class, through collective struggle and creating its own organisations. At this stage, due to the scale of repression, this means underground and semi-underground formations. A nascent independent labour movement is taking shape in China, and despite an intensification of repression this is an irreversible trend.
The number of strikes, some of which resume after an interval even lasting years to continue where they left off, and the crystallisation of a layer of class conscious worker militants, is on a higher level today than five years ago. While Guangdong has been the epicentre for strikes and the nascent workers’ movement, the economic downturn has resulted in strikes in other parts of China to a much greater extent than before.
Still, at this stage, workers’ struggles tend to focus exclusively on economic demands – a form of ‘economism’ – avoiding political questions and a direct challenge to the government. Several struggles, such as the historic strike wave in the motor industry in 2010, have gone a step further and raised the demand for union representation. This demand is fiercely resisted by the regime and the factory owners who see it as a threat to their power.
One quarter of all arrests of workers’ representatives and strike leaders during the past year have taken place in Guangdong, where most strikes occur, but where previously the provincial chiefs adopted a slightly more liberal posture. Many political reformers believed that Guangdong would be allowed to pioneer a more open and tolerant attitude to collective bargaining and workplace organisation, but as much as from Beijing it is the pressure from the local and foreign capitalists as the economic downturn bites that has pushed the province’s leaders to clamp down.
The increasing repression, which is one of the main features of Xi Jinping’s rule, will force the nascent workers’ movement to draw more overtly political conclusions. As strikes have increased in the past year, so there has been a noticeable increase in repression by the state, more arrests and more violence, although the position is never uniform, with some local authorities more hardline than others. Alongside state repression, companies have stepped up reprisals and sackings, targeting workers’ representatives.
As the crackdown on internal opposition spreads to labour rights lawyers and labour NGOs, some of which have – in the complete absence of real trade unions – played an important role in assisting the organisation of strikes, this poses more sharply the role of the state and the regime as the guardians of capital.
A key battleground is the fight for free, high quality public services, against the government’s mania for privatisation and ‘market solutions’, which also shifts an even greater burden onto working class women. The destruction of the old Mao era welfare system during the process of capitalist restoration has created huge problems in the field of childcare, education and healthcare. Secondary education was free in Japan and South Korea when they reached China’s current level of economic development.
But this is not the case in China, where education costs are one of the main economic pressures upon families and also explain why despite a relaxation of the one-child policy since 2013, fewer urban couples than expected have applied to have a second child. One estimate puts the cost of raising a child at 20,000 yuan a year – more than 40 percent of the average household income. In Shanghai’s case, while 90 per cent of young couples in the city are eligible, less than 5 per cent of them have applied for a second child according to the city’s Family Planning Commission.
The regime’s reform of the one-child policy (even its shift to a two-child policy announced in October 2015) is a case of too little, too late, according to many experts. China now faces a demographic timebomb as the labour force gets smaller and the population gets older posing greater demands on the healthcare system and pensions. “Within in a few decades the world’s second most populous group, after Indians, will be Chinese pensioners,” says Peter Cai in China Spectator. In 1980, when Deng launched China on the path of pro-capitalist reforms, the median age was 22.1 years; but in 2013 it was 35.4. The underfunding of the pension system can itself become a trigger of mass discontent in the future, and is already a major barrier to the regime’s attempts to shift to a consumer-driven economy. Beijing’s panic decision during the summer stock market rout to allow the national pension funds to invest in the stock market looks like an accident waiting to happen.
The rural school system is blighted by “overcrowded classes and long commuting time,” noted a report in Xinhua (22 November, 2012). More than half of China’s rural primary schools and a quarter of junior high schools have closed since the start of the century. This was the result of a centralisation and merger programme designed to save money, spurred by the growing ‘black hole’ in local government budgets. From 2002 to 2010 the number of rural primary schools fell by 229,000. A statement by the Ministry of Education in July 2012, urged the reversal of this trend, blaming the mergers for causing, “long commutes for many children… an increase in traffic safety hazards and a financial burden on parents.” School dropout rates have risen alarmingly in rural areas.
There are more than 60 million ‘left-behind children’ in China’s countryside – the children of migrant workers who through poverty and the lack of urban hukou papers, are raised by grandparents or other relatives or placed in boarding schools. Tragedies, like the suicide by drinking pesticide of four children in Guizhou province in the summer of 2015, highlight the plight of these children. Almost 50 percent of left-behind children suffer from depression and anxiety, compared with 30 percent of their urban counterparts. “Left-behind children usually have inferiority complexes, lower self-esteem and lower confidence,” said a report funded by the Heilongjiang provincial government.
The situation in the healthcare system is similarly characterised by gross inequality. Doctors and hospital personnel in the public sector have long complained of low pay, and most public hospitals survive on a ‘business model’ that consists of overcharging for medicines. Sales of drugs account for 40 percent of the total revenues of public hospitals, according to state media. The latest hospital reform aims to cut this share to 30 percent, but has not provided additional funding for the sector. Excessive costs create a high-tension atmosphere on hospital wards where thousands of violent assaults occur every year.
Once again, ‘more market’ is the government’s solution to these problems. Private hospitals, which already account almost half of China’s 24,700 hospitals, although they treat less than one in six patients, are to be given an expanded role. With higher fees, better salaries and staffing levels, the private healthcare sector caters for the wealthy, while public healthcare continues to suffer from underfunding. Giving birth by natural delivery at a public hospital in Beijing costs more than 10,000 yuan (US$1,580), while a private hospital will charge five times as much.
The punitive costs and dysfunction in healthcare and other public services are a major cause of China’s high savings rate and low consumer spending. Local governments account for 70 percent of all public expenditure (60 percent for education and 40 percent for healthcare). This also explains the slow pace of hukou reform, which would force city governments to increase their welfare budgets. The debt crisis in the local government sector, which some economists compare to the relationship between Greece and the EU powers, means that the funds do not exist at local level to turn this situation around. Even bourgeois commentators speak of the need for ‘nationalisation’ of social welfare costs in China. What’s needed is a major reorganisation of the economy – to write-off the debts, bring the banks and major companies into genuine democratic public ownership, confiscate the empty properties of the wealthy, end privatisation and outsourcing, and initiate a democratic plan for the economy and environment.
Under the giant stimulus programme of 2008, local governments took on massive levels of debt but invested this in property deals and ‘white elephant’ projects, many of which lie empty or underutilised. According to Caijing magazine, around 70 percent of the stimulus funding went to infrastructure, while only 8 percent went to social welfare expenditures, such as affordable housing, healthcare, and education. A study by a government-linked think tank in 2014 estimated that 43 trillion yuan (US$6.8 trillion) of infrastructure investments under the post-2008 stimulus programme, or 37 percent of the total, was wasted.
The Xi Jinping era
The Xi Jinping era marks a new departure in the evolution of the CCP regime, with a personal concentration of power that has not been seen since Mao’s days.
Xi, who represents the ascendancy of China’s aristocratic princelings within the CCP regime, aims to buttress the dictatorship and its political power while carrying out reforms to ‘normalise’ its state capitalist economy, looking to the ‘Singapore model’ in order to provide a more formal ‘legitimate’ basis for the economic power of the regime-connected capitalists. His doctrine can be summed up as repression, nationalism and more market reforms.
Xi has abandoned the flirtation of some of his predecessors with the idea of political reform. It must be emphasised that in the post-1989 period, support for political reform has never been particularly strong in official circles. Xi’s position was outlined in his ‘southern tour speech’ delivered at a closed meeting of officials in Guangdong during his first weeks in office, in December 2012, which amounted to a manifesto. Xi claimed the collapse of the Soviet Union was due to the mistake of Gorbachev in taking the road of ‘glasnost’ (a process of limited regime-controlled democratisation). He bemoaned the fact that, “Proportionally, the Soviet Communist Party had more members than we do, but nobody was man enough to stand up and resist.”
Xi’s doctrine was shown all too clearly in the events in Hong Kong in 2014, which triggered the Umbrella Revolution democracy protests. The August 31 ruling of the NPC closed the door on the notion of a Western-style parliamentary system for Hong Kong. The regime evidently now regrets its – admittedly vague – promise made eight years earlier, during the Hu Jintao-Wen Jiabao era, to allow elections based on universal suffrage. Everything is now focused on extricating itself from the expectations this ‘promise’ created and limiting rather than expanding Hong Kong’s ‘democratic space’. The regime’s hardline stance is not ultimately predicated on the situation in Hong Kong, but rather the political fallout in China, encouraging others to challenge the dictatorship and demand their rights. “We move back one step and the dam will burst,” an unnamed senior CCP official told The Standard in Hong Kong at the time of the Umbrella occupations. Having drawn its own conclusions from the mass revolutionary movements that toppled Arab dictators in 2011, as well as the events in Ukraine, Thailand and other flashpoints, the Chinese regime has become more determined to bolster its repressive defences against mass challenges which for reasons of nationalism it portrays as ‘colour revolution’ (i.e. Western-backed).
Not only is political reform out of favour, a campaign is being waged to demonise this notion under the heading of ‘Western values’. Reform advocates who were previously tolerated are now persecuted. This is a sharp change from the situation of only a few years ago where a liberal ‘semi-opposition’ was allowed within a tightly controlled space in order to block the emergence of more radical ideas. This is just one example of the removal by Xi Jinping of the limited ‘checks and balances’, allowing a degree of inner flexibility, that were previous features of the CCP’s dictatorship.
Xi has announced his aim to “lock power in a cage” by which he means to curb the powers of the rival factions. The anti-corruption struggle launched over three years ago is Xi’s main weapon in this battle. He has adopted a twin strategy of repression at both the top and bottom of Chinese society, within the elite and in society at large. New disciplinary rules have been introduced which ban CCP members from making “inappropriate comments” or “vilifying the leaders”. Zhang Lifan, the liberal commentator, interpreted the rule change as follows: “Party members are about to be deprived of their democratic rights. It is not just the liberals who are no longer allowed to talk but also Maoists.”
This shows the futility of the liberal reformers’ ideas of limited and gradual ‘constitutional’ change to avert the danger of revolution. The liberals’ position does not amount to support for genuine democratic rights or political empowerment of the masses but rather the introduction of limited modifications – a freer press and more independent judiciary – to exercise a checking role on the dictatorship. They share the hardliners fear of the ‘chaos’ of democracy. But Xi’s answer is to reject such modest reforms because just as the example of Hong Kong shows, his regime fears any relaxation would cause the dam to burst. Already, rival elite factions conduct a disguised struggle against each other through media publications allied with their factional interests. If the liberals’ policy of more press freedom were adopted, the resulting public intra-regime dogfight would pose a threat to the CCP’s existence.
The anti-corruption struggle
The CCP’s internal factions are not delineated by genuine political or programmatic differences. In the power struggle Xi possesses one indisputable advantage in that his policy agenda – “more market, more dictatorship” – is generally supported by all the major groupings. Factional allegiances are based on power, money, and on the need for protection in the Machiavellian internal struggles of the CCP. This is not to say that more substantial political differences could not arise if the struggle spills into the open.
Xi’s anti-corruption campaign, which began in late 2012, is the most far-reaching in decades – with 414,000 officials disciplined for corruption and 201,600 referred to the courts for prosecution. Around 100 top officials or ‘tigers’ have been placed under investigation. 18 Central Committee members have been expelled from the CCP, more than in the previous two decades.
The campaign has several aims, but wiping out corruption is not one of them because that would require the arrest of millions of officials. A key statistic is that of the 48 most high-profile arrests during this campaign, none of them were princelings. Bo Xilai, a princeling, was brought down in 2012, under Xi’s predecessor Hu Jintao, although in reality this was the prelude to Xi’s campaign.
The CCP’s anti-graft agency, the CCDI, has been given extra resources and powers. Wang Qishan, another princeling, who leads the CCDI and the anti-corruption campaign, is in reality the second most powerful figure after Xi. Through its ‘shock an awe’ tactics the agency has become the key instrument of Xi’s rule, to enforce his writ within the party-state.
But this campaign also carries huge risks for Xi and the regime. Popular anger needs to be ‘managed’ to prevent it getting out of control. If pursued too vigorously the anti-corruption can descend into open civil war within the ruling elite, with rival camps turning to the masses for support against their enemies. So, to keep control Xi and his graft busters need to maintain a delicate balance.
The regime does not want the public involved in this campaign – a point hammered home by the arrests and long prison terms served on a number of anti-corruption whistle-blowers. “While Mao’s Cultural Revolution almost destroyed China, Xi’s war on corruption is a masterpiece in controlled destruction,” claimed the Washington Post’s bureau chief in China, Simon Denyer.
Following the trial and imprisonment of ex-security chief Zhou Yongkang in May, there are signs the corruption struggle may scale down rather than press on against more high-level ‘tigers’. However, this may have more to do with the economic downturn and the summer’s financial turbulence, further straining relations within the ruling elite. Xi plans to use the anti-corruption campaign as a tool of his economic reform programme especially for the restructuring of the SOEs, which necessitates the break-up of factional-crony clusters.
This process began already in the energy industry during the purge of Zhou. The smashing of his ‘petroleum faction’ which previously controlled the state oil industry formed an important sub-plot opening the way for Xi’s planned restructuring of that industry along more ‘normal’ market lines. Now the graft-busters are being unleashed upon the airline industry and, in the wake of the stock market crash, on the banking and financial sector. Even if Xi is forced to compromise and slowdown the anti-corruption struggle, he is unlikely to formally wind it up, but rather hold it as a reserve weapon and deterrent.
The Western capitalist states, idolised by many Chinese liberals, have adopted a very ‘pragmatic’ attitude to the Chinese dictatorship, and to Xi’s lurch into greater authoritarianism. They oppose and dread radical democratic change and raise only token protests over repression in China. The US and its allies understand that, while they want to check China’s rise to superpower status, the overthrow of the current regime would not be in the interests of capitalism internationally. Nevertheless as the struggle for markets, trade agreements and economic domination sharpens, governments are stepping up the battle for and against ‘Western values’.
Mass arrests of almost 300 Chinese human rights lawyers and NGO activists since the summer marked a new stage in Xi Jinping’s struggle against ‘Western values’, which also extends to the media and universities. Even the spouses and children of arrested lawyers and writers have been persecuted, their movements restricted, echoing the terror methods of past imperial regimes. The regime is hypocritically stepping up its brainwashing against ‘Western values’ in the classrooms, including banning text books and in some cases visiting lecturers.
Yet almost the entire leadership of the CCP have sent their children to Western universities – a list that includes Xi Jinping, premier Li Keqiang, vice president Li Yuanchao, and vice premiers Wang Yang and Ma Kai, along with thousands of other students from elite families (there are currently 275,000 Chinese students in the US). The campaign against ‘Western values’ shows the regime’s fear that universities will again become a hotbed of radicalisation and anti-government sentiment. The stifling ‘thought control’ measures that the authorities wish to impose on the students can trigger a new ‘May Fourth’-style movement, echoing the radicalisation of students in Hong Kong and Taiwan. China is not alone in its increasing use of ‘anti-Western’ propaganda: Putin in Russia and Erdogan in Turkey also blame every economic and political problem on the West, a position mirrored by the China-bashing and Russia-bashing of right-wing politicians in the US.
Already during the final years of Hu Jintao’s rule, during which time China’s security apparatus was led by Zhou Yongkang, the internal security budget outstripped the fast-growing military budget. Since Xi took office no figures have been published, but the last available figures, from 2013, showed the regime spent US$130 billion on internal security (police, state security, prisons and judiciary), which was equivalent to the GDP of Vietnam. The regime is creating “a garrison state” says Jerome Cohen, an expert on the Chinese legal system.
Therefore, contrary to illusions of the liberals, the current regime is unwilling and unable to relax its political controls and ease repression for fear of releasing a social tsunami that could sweep it from power. It can only be forced to make democratic concessions under mass pressure, which demands uncompromising revolutionary struggle.
There are parallels with the position that faced the working class in Tsarist Russia, brilliantly analysed by Leon Trotsky in his writings on the Permanent Revolution. Under the tsar’s brutal rule, Trotsky explained, “… it became ever more difficult, and psychologically ever more impossible, for the government voluntarily to take the path of parliamentarism. The only way out of these contradictions which its situation indicated to society was through the accumulation of sufficient steam within the boiler of absolutism to burst it.” (Leon Trotsky, Results and Prospects, 1906)
These contradictions are especially evident in the troubled non-Han regions where the national question is now a boiling cauldron. In Xinjiang especially, but also in Tibet and the Tibetan regions of neighbouring provinces, the regime has adopted a policy of militarisation and large scale Han Chinese settlement. “The general trend toward repression that we see all over China is particularly pronounced in Xinjiang,” a spokesperson for Amnesty noted.
These regions are being used by the state as a training ground for an iron fist policy that can be used in Han-dominated regions in the future. The purge launched by Xi within the general staff of the PLA, under the mantle of ‘anti-corruption’, is to insure the regime’s control over the military – and his own position – at a time of mounting political threats.
In 2014, the number of arrests in Xinjiang doubled to 27,000 from the previous year, while courts sentenced twice as many people to execution or life imprisonment. Extra-judicial killings have become regular occurrences and many fatal clashes, officially recorded as ‘terrorism’, have in fact been sparked by invasive policing including house-to-house searches and raids in Uighur dominated districts. “Some of the police are aware of the injustices against the Uighurs when they arrest us,” a farmer who was arrested for attending a prayer service told Radio Free Asia, indicating how national tensions have inevitably permeated the state apparatus.
The regime has stepped up the use of crude religious controls. This includes banning students from fasting during the Ramadan holy month and ‘Project Beauty’: a government campaign to stop Uighur women wearing veils and hijabs. Ironically, for a regime that eschews ‘Western values’ the regime has justified its clampdown on Muslim headwear by citing Belgium and France, which have introduced similar bans. These policies, combined with enforced ‘Sinification’ in the education system, which discriminates against the Uighur language, are inflaming deep social grievances. A layer of Uighur Muslim youth are being driven towards extreme right-wing jihadist ideas in the mistaken belief these offer a way to fight back.
The terrorist attacks in Tiananmen Square in 2013, and the horrific attack at Kunming’s railway station in 2014, known as ‘China’s 9/11’ are an inevitable outcome of the regime’s hardline policies. The regime’s actions have “weakened indigenous and moderate religious practises” noted the US think tank, the Hudson Institute. “This will, among other things, continue to create opportunities for radical groups to penetrate and take root in the region and this could make the [regime’s] fears over radicalisation among Uighurs in Xinjiang a self-fulfilling prophesy,” it warned.
The imprisonment for life of Uighur economics professor Ilham Tothi, on a charge of ‘separatism’ lays bare the contradictions of Xi Jinping’s zero tolerance approach to dissent. Tothi is a moderate – an atheist – who does not oppose Chinese rule in Xinjiang, but has voiced criticism of its language and cultural policies. By allowing no outlet for within-the-system dissent – whether feminists, reformist labour rights activists, or liberal intellectuals such as Tothi – Xi’s regime is blocking all other roads other than the road of revolutionary struggle.
The group of young Uighurs behind the Kunming massacre had unsuccessfully tried to escape from China, probably to enlist with jihadist groups in the Middle East. When this failed they turned back to Kunming to carry out one of the most shocking acts of terrorism in modern times resulting in 29 dead and 140 injured. Socialists have always opposed the methods of individual terrorism. Far from hastening the collapse of a tyrannical state these methods ultimately reinforce it, by giving it the ideal pretext to increase repression. By dividing and disorientating the ranks of the oppressed, terrorism enormously complicates the task of building organised mass resistance.
National and religious minorities number 114 million (8.5 percent of China’s total population). In absolute terms this is a greater number than the number of non-Russians living in the Soviet Union at the time of its break-up, in which national movements played a decisive role. The regime of Lenin and Trotsky, based on genuine socialism and workers’ democracy, acted as a magnet for the oppressed nationalities of the former Russian empire by offering both national liberation and a voluntary union, while the subsequent dictatorial and oppressive regime of Stalin and his Stalinist successors created explosive divisions. CCP rule began as a Stalinist dictatorship, only to shift to a grotesque form of authoritarian capitalism, which can only uphold a multinational state on the basis of force.
Socialists stand for united working class struggle against state repression, against racism, and against all forms of persecution whether on religious, political or ethnic lines. The position of Lenin, Trotsky and the Bolshevik party in Russia in relation to the national question was for full and immediate democratic rights, including the right to genuine autonomy or independence for the national minorities if this is their choice. This must be linked to a struggle against the dictatorship’s capitalist reform agenda, which threatens and indeed is already producing major economic shocks demanding ever greater doses of repression.
Splits at the top
The re-centralisation of power under Xi Jinping, and his concentration of personal dictatorship, marks a radical departure from the ‘collective leadership’ model that has operated for almost 40 years. This model became increasingly discredited within leading circles during the rule of Hu Jintao, who was given the nickname the ‘Woman with bound feet’ because, hemmed in by the other members of the Politburo Standing Committee, who in turn were connected to crony-factions, he could only take small steps. This produced governmental stagnation.
Xi’s aim is a radical shake-up of both the party-state apparatus and the economy, using the anti-corruption campaign as his main weapon. Speaking to an audience of American and Chinese billionaires in Seattle during his first state visit to the US, in September 2015, Xi joked that the situation of the Chinese government was no ‘House of Cards’. But the plot of the popular American TV drama starring Kevin Spacey is less treacherous and Machiavellian than the raging struggle within the Chinese elite.
There are parallels with how Vladimir Putin launched a ‘war against the oligarchs’ more than ten years ago to cement his control and re-centralise power within the Russian state. Xi is known to be an admirer of Putin. This is the strategy he has adopted to overcome institutionalised inertia and assert control over the factional ‘warlords’.
During the process of capitalist restoration of the past three decades extensive patronage networks built around top officials have seized control over key economic spheres, allowing these officials and their families to become fabulously wealthy and to bend the policies of the government to suit their business interests. The princelings, like Xi himself, have dominated this process. But even a ‘commoner’ like Zhou Yongkang was able to amass documented wealth of at least one billion yuan (US$160 million) according to the New York Times, mainly through his de facto control over the oil industry. Within the former Politburo Standing Committee (2007-12) there were two members whose families’ had amassed even greater wealth than Zhou’s, namely Wen Jiabao (16.6 billion yuan) and Xi Jinping (2.2 billion yuan).
Xi is attempting to dismantle or permanently weaken the CCP’s factional-crony networks, thus freeing his hands to implement a bolder reform agenda, which will inevitably encounter strong resistance because it will create both winners and losers within the ruling elite. Therefore, this is not a question of the personal traits or ‘style’ of Xi Jinping, but rather a reflection of a political crisis that calls forth extreme measures. For the regime, this is akin to “a surgeon operating on himself,” says Hong Kong legislator Leung Kwok-hung.
Trotsky explained in the 1930s, when the system of bourgeois democracy was in deep crisis, that the rise of Bonapartist or military-police dictatorships was akin to the ‘fuses’ of democracy blowing out, leading to the ‘short circuit’ of dictatorship. The Chinese regime, as far from a democracy as one can get, nevertheless especially after the Mao era developed its own system of checks and balances – collective leadership and ‘power sharing’ between factions. This was to guard against any one individual wielding too much power and endangering the system. Under Xi, these internal safeguards are being set aside.
Xi has chosen to rule through a series of new ‘leading central groups’ under his personal control. These supplant existing government structures in areas ranging from economic reform to defence and even the internet and cybersecurity. Xi now holds no less than eleven top posts making him “Chairman of everything”.
To support this enterprise a Mao-like cult of personality has been built up around Xi through the media and the fawning speeches of his underlings. However, the descriptions of Xi as “the most powerful leader since Mao” are exaggerated. He has won the upper hand, up to this point, in the power struggle that began before the 18th CCP Congress. In the jailing of Bo Xilai and Zhou Yongkang he has disposed of two formerly powerful adversaries, along with their immediate crony networks, and used their public humiliation as a deterrent to other challengers within the ruling elite.
However, the sternest tests still await Xi. Already, given the financial turmoil of the summer and the government’s policy failures, in which Xi is culpable, tensions have sharpened within the ruling stratum. This was acknowledged in unusually blunt language when the People’s Daily spoke of “unimaginable” resistance to Xi’s reforms from unnamed CCP elders and officials at the traditional summer conclave in Beidaihe. By taking control of so many of the levers of power, Xi has put himself in the firing line when things go wrong.
There has been widespread speculation that Premier Li might be dismissed. Li personally pushed for the ‘aggressive’ stock market rescue in the face of scepticism from other government departments and especially from the central bank. But in this case Li would merely be a proxy target for the malcontents within the elite whose aim is to check Xi’s position. To sideline Li in the short-term is unlikely for that very reason, and because this would be an admission of crisis in the regime. But Li could be ‘reassigned’ to a lesser or more ceremonial post after the next Congress and leadership reshuffle in 2017. This would be a more traditional CCP way to scapegoat him for recent economic setbacks.
The increasing tensions at the top have led to rumours of plots to remove Xi and even of a possible military coup. In a speech to the Politburo, in June 2014, Xi spoke of risking “life, death and reputation” to pursue the anti-corruption struggle. In the same speech, which showed the sense of crisis within the ruling group, Xi said, “the two armies of corruption and anti-corruption are in confrontation, and are in a stalemate.” The possibility of a plot to remove Xi has been raised by many commentators including the veteran American China watcher David Shambaugh, formerly a favourite of the CCP, who then drew the regime’s ire when he declared that Xi Jinping’s “despotism is severely stressing China’s system and society – and bringing it closer to a breaking point.”
The extension of Xi’s anti-corruption purge into the PLA, which alongside the SOEs is now its main focus, is an ‘insurance policy’ on Xi’s part to secure control over the military leadership and insure their loyalty. This is in preparation both for external and internal shocks – the threat of war and revolution. Xi has taken a much more assertive nationalist position in foreign policy and is engaging in an increasingly dangerous diplomatic ‘chess game’ in the South China Sea against US imperialism, through which he wants to project China’s role as a major power but also to strengthen his hold on the military.
Deng Xiaoping famously counselled, “Hide your strength, bide your time.” But Xi has clearly discarded this advice. He has made a series of statements stressing China’s rise as a great power, and these are designed mostly for Xi’s domestic audience, using nationalism for populist gain and to strengthen his hand in the national power struggle. At a meeting in Paris last year, Xi quoted Napoleon who said that China was “a sleeping lion,” – but he added that the lion “has already awakened, but this is a peaceful, pleasant, and civilised lion.”
The US ‘Asian pivot’ unveiled in 2011 marked a new phase of inter-imperialist rivalries on a world scale. Through the ‘pivot’ Washington hopes to check China’s rising economic and financial pull in Asia, which Beijing hopes to translate into military and political dominance in the future. With its global power weakened by ruinous wars in Afghanistan and the Middle East, followed by the global capitalist crisis originating on Wall Street, US imperialism finds itself economically on the back foot across much of Asia.
China is the biggest trading partner with the ten economies that make up the Association of South East Asian Nations (ASEAN), home to 600 million people. Bilateral China-ASEAN trade was worth 480 billion dollars in 2014 compared to 100 billion dollars worth of trade with the US. But with the onset of the current economic difficulties in China, the Obama administration sees an opportunity to strengthen its own hand, raising tensions further between the two biggest powers. The unveiling in October of the Trans-Pacific Partnership (TPP), a 12-nation trade pact that seeks to exclude China, represents a new chapter in this struggle.
This is also the background to what the New York Times described as a “dangerous game of chicken” in the South China Sea. China and several neighbouring states have overlapping claims to uninhabited islands in the Spratly and Paracel archipelagos, and the surrounding territorial waters. These are believed to be rich in mineral and energy deposits, but also have important military implications. Like other claimants but on a much bigger scale China has undertaken land reclamation and construction of airstrips and other military or potential military features on islands and reefs under its control.
The CCP regime has exploited this issue for domestic political purposes to whip up pro-regime nationalism. But its nationalist rhetoric and actions have inevitably provoked a backlash in the wider region, enabling the US and its ally Japan to muster increasing support from regional governments for a stronger US military presence as a counterbalance to China.
In stepping up its claims to control over the South China Sea, Beijing saw this as a favourable drill ground in which to pursue military modernisation and in particular to develop a blue-water navy, while avoiding a premature collision with the US which still enjoys a crushing military superiority. Its counter claimants are much weaker militarily and the competing sovereignty claims are complex and unclear. The Obama administration is now determined to disrupt this strategy by inserting itself squarely into the conflict zone, via naval expeditions and by increasing its support to ‘proxy’ governments such as the Philippines and Vietnam which are involved in disputes with China.
One Belt One Road
This amounts to a new ‘Great Game’ being played out between Beijing and Washington for domination in Asia. China has moved to counter the US ‘pivot’ and its anti-China trade pact, the TPP, by launching a series of grand economic and diplomatic projects for Asia and beyond. The centrepiece is the One Belt One Road project aimed at constructing economic corridors across Eurasia, Southeast Asia and the Indian Ocean and encompassing no fewer than 60 countries. Beijing hopes in this way to create a pro-China economic sphere based on Chinese state-backed investments in transportation routes and energy infrastructure.
But another aspect of the One Belt One Road, sometimes described as “China’s Marshall Plan”, is the regime’s urgent need to develop new markets in which to offload its surplus industrial output. Xi’s government has massively hyped the One Belt One Road idea to restore confidence in China’s economy amid the current downturn. But there are many reasons to doubt the viability of this ‘vision’ from an economic and political perspective. For one, there are the geopolitical risks involved in constructing – and protecting – highways, pipelines, airports and rail connections across some of the world’s most politically unstable states including Afghanistan, Pakistan and the states of Central Asia. There is also the potential for a clash of interests with Russian capitalism, which regards the former Soviet republics of Central Asia as its traditional ‘backyard’. Unofficially, Chinese military leaders have admitted that the One Belt One Road programme will include a ‘security component’ – hinting at a future Chinese military presence in some of these states.
Perhaps even more pertinent is the question of how capable the Chinese regime is of financing such grandiose plans given its debt problems and the precarious state of the banking system. Some of the projects that come under the broad heading of the One Belt One Road initiative will undoubtedly start, and some, like the Chinese-built and managed port of Gwadar in Pakistan, have already been built. But the grander sweep of Beijing’s masterplan is unlikely to be realised within the framework of a capitalist and imperialist world system. Rather, the Chinese regime is embarking on a new adventure, born of its own internal contradictions, that could see it replicate in other countries all the problems it has created at home – vanity projects, corruption, overcapacity and even more debt.
Only under a system of democratic planning, based on voluntary cooperation between governments of the working class and poor farmers, socialist governments that rest upon democratic public ownership and control of the economy, would it be possible to successfully realise such an ambitious plan of state financed initiatives and insure it meets the needs of the people rather than the profits of the big corporations and their cronies in government.
The losers from the ongoing escalation of military and geopolitical tensions in Asia are the workers and poor farmers of China and other Asian nations. Southeast Asia’s arms expenditure has increased by 50 percent in the past decade. In China’s case the rise is even bigger. Governments are drumming up nationalism and increasing arms budgets at the expense of urgently needed social spending on housing, education and environmental protection including defences against rising sea levels and other effects of carbon-driven climate change. Overfishing and wasteful fishing methods have severely depleted fishing stocks in the South China Sea, which were formerly some of the richest globally, but have declined by between 70 and 95 percent since 1950 according to a study by the University of British Columbia. This shows the urgent need for a common programme of action by the 12 states that border the South China Sea, but which under capitalism, a system based on national rivalries, is impossible.
For almost two decades after 1989, China’s rapid economic expansion was absorbed and facilitated by global capitalism due to exceptional conditions in the immediate aftermath of the collapse of Stalinism in Russia and Eastern Europe and the rapid (although inherently unstable) development of Asian capitalism. But today the global pie of capitalism is not expanding, but rather shrinking, and the struggle for each portion can only intensify among the rival ruling groups. Only the working class in China and internationally, by organising around a socialist alternative, can put an end to the economic destruction of capitalism, which is preparing new crises and international calamities.