In 1978, Deng Xiaoping, who Mao Tse Tung called a “capitalist roader”, initiated an economic reform program labelled “market socialism.”
Within two decades, China had managed to transition from a closed communist state to an open centre of dynamic capitalism with the greatest economic growth rates in human history.
After the onset of the Global Financial Crisis (GFC) in 2008, China immediately injected $US586 billion into its economy in classical Keynesian counter-cyclical stimulus spending. The next year, it began the largest fixed investment stimulus program the world has ever seen.
Globally, fixed investment (physical assets) contributed no more than 25% of GDP growth in the 1990s. By 2009, fixed investment was responsible for 90% of GDP growth.
If there is a single statistic that conveys the enormity of this infrastructure program, it is cement production. Between 2011 and 2014, China used more cement than the US did in the entire 20th century — 6.6 billion tonnes in four years compared with 4.5 billion tonnes in 100 years.
One result of this huge program of state-sponsored growth has been a property bubble that predictably burst, leaving roads to nowhere and ghost cities in its wake.
Another result is huge overcapacity in industrial production in the aluminium, cement, glass and steel industries. China produces more than 800 million tonnes of steel a year, half of all global output, yet its domestic needs are no more than 600 million tonnes a year.
In late December, China's Central Economic Work Conference determined that two of the top economic policy priorities for this year were to cut housing stock and lower excess industrial capacity.
Just prior to the conference, China's Premier Li Keqiang announced that companies that did not meet energy efficiency, environmental, product quality, profitability and safety standards would be shut down or restructured. But at the same time, the premier gave companies three years to self-regulate.
China's economic model is often referred to as “neoliberalism with Chinese characteristics”. What actually dominates its economy, however, is state authoritarianism as the country attempts a painless transformation to a consumption-led economy.
The stimulus program of the past six years has been financed by forcing state-owned banks to lend money to state-owned enterprises (SOEs).
The SOEs took advantage of this cheap money to turn a tidy profit by lending it on to the private sector at extremely high interest rates. Private sector companies and SOEs then both used their overvalued assets as collateral for further borrowing.
Between 2008 and 2014, available new credit in the economy rose by more than $US20 trillion – an amount that exceeded the size of the whole US commercial banking sector by one-and-a-half times.
With bank deposit accounts yielding zero real return, and property investment no longer a profitable avenue for exploitation, excess capital had nowhere to go except to an already overvalued share market.
The Chinese government's attempts to manage the inevitable share market downturn resulted in embarrassing failure — the Shanghai Composite Index plunged 43% in a two-month period last year. In early January, it collapsed twice in the space of two weeks — followed by a run on the currency.
China's pivotal position in the global economy — it generates about 17% of world GDP but has accounted for a third of world growth for the past 10 years — sent share markets tumbling around the world.
Hedge fund manager George Soros was merely stating the obvious when he warned that the slowdown in China meant that the global economy was back once again to the crisis of 2008 — the GFC has never gone away.
Which is why head of European rates strategy at the Royal Bank of Scotland, Andrew Roberts, has advised investors to “sell everything except high-quality bonds — this is about return of capital, not return on capital.”
The Chinese economy is still expected to grow this year, but it will almost certainly do so at a much reduced rate. Modelling by the investment bank JP Morgan, which examined the effects of the commodity market crash on China's industrial output, suggests that it will shrink to 2%.
The World Bank now estimates that each 1% decline in China's growth rate will cut growth rates in other Asian economies by about 0.8%.
This is not good news for Japan, the world's third largest economy, which has spent the last quarter of a century hovering between stagnation and official recession. When it again slipped into recession in November, it was the fifth time in seven years.
Russia, Brazil and South Africa are in deep recession, the eurozone grew by a miserable 1.6% last year and the data for the US is expected to show that in the last quarter of 2015 growth dropped to barely 2% — well below the long term average of 3.3% between 1950 and 2014.
And then there is the debt problem. In Japan, the ratio of gross public debt to GDP has gone from 67% in 1990 to 246% last year. In the US, federal debt has risen from 35% of GDP in 2007 to 74% today.
Calculating China's debt to GDP ratio is no easy feat. On one account it has gone from 160% in 2007 to more than 240%. According to global management consulting firm McKinsey & Company, it presently stands at 282%.
This is not the first time that the Chinese economy has tanked, it did so in 1998 in the wake of the Asian financial crisis. The state-imposed solution — shutting down state-owned industries and retrenching 21 million workers over a three year period — seems an unlikely fix this time around.
As political economist David Harvey has pointed out, China must either absorb or violently suppress its massive labour surpluses.
A much more militant and confident working class, self-organising and willing to adopt innovative forms of struggle, has emerged in China since 1998. One of its achievements has been average wage rises in excess of 10% a year over the past decade.
So any attempt by the state to repeat the “creative destruction” of jobs of 18 years ago risks a confrontation of much greater significance than the Cultural Revolution of 50 years ago.
On January 19, the International Monetary Fund revised its global growth estimates downwards by 0.4% in 2016 and 2017 to a still optimistic 3.4% and 3.6% respectively.
The widely distrusted official data for China's GDP growth in 2015 was 6.9%, the slowest growth for 25 years. Debt is growing at more than twice this rate, which suggests that a significant amount of new lending is being used to pay off old loans. This leaves no scope for a repeat of the 2009 stimulus program that ignited the global commodity boom.
Investment bank Citigroup says there is a 65% chance China will lead the global economy into recession this year — and this is before the implosion of the US shale industry, groaning under the weight of $200 billion of debt as the oil price continues to fall.
A large part of the industry seems headed for bankruptcy, which will cost the major US banks billions of dollars.
The one thing that can be said with confidence is that all economic indicators point to China going into recession and taking the rest of the world with it.
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