How troubled Chinese capitalism is exposed by Tianjin, rising debt

August 23, 2015

Tianjin residents protest, August 20.

Capitalism with Chinese characteristics is in some strife. This is largely because the government’s attempt to keep growth at an unsustainable 7% a year is fuelled by equally unsustainable debt.

Corporate and local government debt has grown by 50% since 2009, and total debt, which includes household debt, is now close to 187% of GDP.

China’s corporate sector, which includes state-owned enterprises, is increasing its debt at a rate eight times greater than the state. It now has the largest accumulation of corporate debt in the world.

This year, China became the world’s biggest corporate debt market with a third of all global debt. Over the next four years, the total outstanding corporate debt across all economies is forecast to rise to about $US100 trillion, with China holding about 40%.

Debt at these levels raises the risk of default. Some corporate rating agencies are predicting that China is fuelling the next debt crisis.

The Chinese steel industry has been one of the main drivers of growth in the country, and its present parlous state reflects that of the broader economy.

The European steel industry association, Eurofer, says China’s steel industry has a total installed capacity of 1.1 billion tonnes. Its excess capacity of 340 million tonnes is more than double the total steel demand in the European Union.

In the first seven months of this year, China’s steel exports rose by more than 26% to more than 62 million tonnes.

China’s dumping of its excess production on world markets has led to the European Union imposing provisional duties on Chinese steel imports of up to 25% to protect its own steel industry. India has also placed an anti-dumping duty of $316 a tonne on Chinese steel imports and US regulators are considering import duties as high as 266%.

Some commodity analysts say China’s steel industry is losing an average of between $40 and $50 a tonne on the steel that it sells into the domestic market as a result of a 17% drop in building activity. This has dampened demand by 50 million tonnes.

Solving one economic problem leads to another. Devaluing the yuan in an attempt to shore up the steel industry has led to capital flight. Pouring more cash into the financial system to offset this has led to gyrations in the share market.

The slowing of the Chinese economy is concentrated in the six provincial areas where heavy industry is located. The International Monetary Fund (IMF) estimates that while these provinces account for 15% of China’s GDP, they also account for 80% of the slowdown in the past twelve months.

One of these areas is the Tianjin municipality where the manufacturing sector accounts for more than 50% of the local economy. Tianjin is also home to some of the 38% of the Chinese population living in areas where long-term air quality is decidedly unhealthy.

Physicists from the University of California, Berkeley, recently calculated that air pollution is killing about 4000 people a day in China.

Shandong province, just south of Tianjin, has three of the most productive goldmines in China. One county in Shandong has 68 goldmines, and China is now the world’s foremost global supplier of gold after a doubling of output over the past decade.

The port of Tianjin is where gold and other commodities are exported. It was the chemical used to dissolve and separate gold from the ore in which it is commonly found — sodium cyanide — that led to the horrific explosion on August 12 that killed and injured hundreds and has left thousands homeless.

Sodium cyanide is highly toxic and should be used only under strict safety protocols in a highly diluted solution. Which begs the question as to why 700 tonnes of it — 34 times the amount that the factory was permitted to store — were held there before they went up with the explosive power equivalent to 24 tonnes of dynamite.

Punishment will no doubt be swift for the well-connected factory owners, one of whom is the son of the former Tianjin Port Authority police chief. But endemic corruption is unlikely to come to a halt soon.

A few days after the Tianjin explosion, the Chinese National Audit Office reported that $2.1 billion was embezzled from the budget that was meant to fund China’s public housing program.

Corruption and the slowing economy have led to social unrest. In 2011 China spent $US111 billion on internal security compared to $US106 billion on national defence.

Although official figures on dissent are hard to come by, the Europe China Research and Advice Network (ECRAN), which is funded by the European Union, estimated that in 2010 the number of public protests were between 180,000 and 230,000. Environmental degradation and labour disputes were prominent among them.

The IMF has advised China to stop stimulating its economy and accept much lower growth rates to avoid a credit crunch. But it is damned if it does and damned if it doesn’t.

Most of all, the state fears the social unrest that would follow from the joblessness the IMF prescription would bring. So avoiding this is a key part of economic planning.

It is difficult to escape the conclusion that the booming Chinese economy that rescued the world from a repeat of the Great Depression with its counter-cyclical deficit spending may have only postponed it.

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