Vol. 74/No. 33      August 30, 2010

China has experienced rapid growth and modernization in major urban centers of the country since the Chinese Communist Party government began to encourage the development of private business and market relations and open the country to direct foreign investment some 30 years ago.

A major aspect of the government’s strategy has been to rapidly expand industrial output and capture the largest share of the world’s merchandise export market.

Historic conditions and decades of anti-working-class government policies provided an opportunity to entice foreign capitalists to cash in on China’s cheap source of labor. With the development of foreign and domestic private business, workers’ labor was increasingly bought and sold as a commodity—the basic mode of exploitation under capitalism.

Disparities in living standards between urban and rural areas and between different parts of the country were leveraged to increase competition among working people, adding downward pressure on wages. This includes some 211 million migrant workers compelled to leave the countryside for work in the industrial centers, where they were denied social benefits extended to other urban residents. And use of state power, which includes state-controlled unions, was employed to keep workers in line and ensure a sufficient flow of labor.

Large amounts of foreign capital were attracted to the low wages, as well as cheap land, tax breaks, and other incentives provided by the government. To the foreign investment was added state funds toward the country’s export industries, infrastructure projects, and joint ventures with foreign capitalists. As a result, productivity increased through the development of productive forces and intensification of labor.

These are some of the factors that allowed the Chinese economy to capture nearly 10 percent of the world’s merchandise export market in a span of three decades.

Hundreds of millions of working people in China have paid the price for this course, which has resulted in massive displacement of rural toilers, disintegration of workers’ social wage, declining literacy and health, and worsening conditions of work and living.  
 
Decline in exports and investment
The country’s economy has become heavily reliant on exports, making it vulnerable to declining consumption in the major capitalist countries. The value of China exports decreased for the first time in 2009 by $240 billion, or 17 percent.

Direct foreign investment has also shown susceptibility to the depression. After several years of rapid increase, foreign investment declined by 2.6 percent last year.

At the same time, a growing disparity has developed between the accumulation of wealth from China’s exports and the underdevelopment of its domestic market.

Domestic consumption as a percentage of gross domestic product declined from 46 percent to 36 percent from 2000 to 2009.

The government has announced intentions to work toward expanding the domestic market. As one stopgap measure it initiated household subsidies for cars and durable goods to “stimulate” consumer spending—the Chinese Communist Party’s version of the U.S. “cash for clunkers” program. Despite a surge in spending for these commodities, the overall year-on-year increase in retail sales in July was the lowest since February last year.

Capitalist methods have created a layer of wealthy individuals in China. The number of mainland Chinese millionaires (in dollars) is about 477,000, the fourth highest in the world. It is second only to the United States in the number of billionaires. A “middle class” capable of buying more than basic necessities—with annual incomes higher than $5,000 and to whom such “stimulus” subsidies are largely directed—represents roughly 110 million people, or 8 percent of the population. Nearly half the population lives on less than $2 per day.

Because market relations and profit motives have come to dominate the country’s mode of distribution, the Chinese economy cannot absorb the wealth generated by the state and private business. While more government funds have recently been directed toward development projects throughout the country, a large portion of China’s assets is parked in investments and securities outside the country. State firms have invested billions in companies and major infrastructure projects abroad. China holds $1.464 trillion in U.S. government and corporate debt, more than half in the form of U.S. Treasury securities.

As the largest holder of U.S. securities in the world, the Chinese economy has helped finance the U.S. federal budget deficit, playing a role in keeping U.S. interest rates low and paying for Washington’s protracted wars abroad.

The buying up of U.S. securities has been one of the methods employed by the Chinese government to keep the value of China’s currency low relative to the dollar and other major world currencies. This low exchange rate has been another factor in keeping prices of goods exported from China relatively low and restricting imports form the most advanced and productive nations, to the irritation of Washington and other imperialist powers who have made a ballyhoo with cries of currency “manipulation.”

Some of this pressure has lifted in recent months as Beijing has allowed its currency to begin to appreciate.  
 
Banking crisis looms
The banking system remains dominated by the state, but increasingly has incorporated private and foreign banks and other financial entities. The state banking system’s chief role in the management of a centralized planned economy has receded; it increasingly functions as independent financial institutions focused on “making money.” Alongside legal banks, an underground lending system has also developed, which accounts for roughly one-quarter of all loans.

Like those in major capitalist countries, Chinese banks have increasingly become involved in a whole range of transactions aimed at boosting bottom lines through leveraging of fictitious capital. About 20 percent of new bank credit is directed to stock market speculation, for example.

In response to the effects of the world economic and banking crisis in 2008, in which the country’s main stock market index lost nearly two-thirds of its value, the government enacted a two-year $586 billion “stimulus” package to fund infrastructure projects, provide tax cuts to businesses, and subsidies to industry and consumers. The state banks went on a lending spree, providing easy low-interest credit for state and private business, investors, and speculators. Last year banks increased credit by one-third, reaching 140 percent of gross domestic product, much of which is considered uncollectible.

Many of these most recent loans provided the illusion of economic growth, while only inflating financial bubbles such as has developed on a massive scale in real estate.

More recently, the government announced moves to tighten credit in an effort to avoid “overheating” the economy. However, about $192 billion, amounting to 28 percent of state bank loans, were simply moved off the books to conceal the mounting credit risks. Similar to the way U.S. banks transfigured subprime loans and other debt as sellable assets, these loans were sold to trust companies and repackaged as securities.

The final article will review the consequences of the geographical shift in production and labor and development of the proletariat.  
 
 
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