only because export markets were volatile, but also because overinvestment in exports had left considerable underused capacity in the economy. It would more place more purchasing power in the hands of the vast majority of peasants and workers, who had been disadvantaged by the priority given to export-oriented industries and profits. And politically, it would help China’s leadership fend off international complaints about the massive trade surpluses the country was running.
The problem was that the shift would also entail transforming the composition of winners and losers in the new China. The country’s export-oriented growth has created a set of political and economic interests that have congealed into a powerful lobby over the last 30 years. This includes government planning bodies like the National Development Reform Commission and the Ministry of Finance, both of which had fathered the strategy of export-led industrialization; export-oriented state and private enterprises; local government and Communist Party bodies in the coastal provinces; and state-owned construction firms whose infrastructure projects undergird the export-led strategy.
One key interest of this lobby has been the undervaluation of the yuan to make Chinese exports competitive. Another has been keeping interest rates low – in fact, negative, when inflation is taken into account – so that people’s savings can be relented at low rates to favoured export-oriented firms and construction companies. Economists have termed this policy ‘financial repression’.
Alongside the small and medium entrepreneurs serving local markets, the losers include workers, peasants, and the general population in their roles as savers and consumers – in short, as the economist Hongying Wang put it, all those who have “suffered from the financial and public finance systems that have deprived them of their fair share of the national wealth”.
The export lobby didn’t just neutralise the plan to make domestic consumption the cutting edge of the economy. It was also able to hijack the massive stimulus program that had been intended to place money and resources in the hands of consumers. According to statistics Wang cited from Caijing Magazine, some 70 percent of the stimulus funds went to infrastructure, while only 8 percent went to social welfare expenditures like affordable housing, health care, and education.
This ‘financial repression’ has had particularly pernicious consequences. With little money to be earned from their bank deposits, a great number of the Chinese public gravitated toward the real estate and property markets. This move was encouraged by the authorities, who were worried about the public’s discontent with the lack of profitable outlets for their savings. This encouragement included easing lending requirements at state banks to allow people to invest not only their savings but also borrowed cash.
Speculation in property was the investment of choice for many years. But as in the US during the subprime property bubble, the market attracted too many investors, leading to a bust at the beginning of 2014. The price collapse led to thousands of unfinished skyscrapers, ghost cities, abandoned housing projects, and virtually deserted shopping complexes like the New South China Mall in Guangdong, which had been promoted as ‘Asia’s biggest mall’. This was like Thailand during the Asian financial crisis in 1998, but on a much, much bigger scale.
After the real estate debacle, investors fled to the stock market. With China’s stock market value going above $10 trillion and the Shanghai index rocketing upward by 150 percent between mid-2014 and mid-2015, the market seemed both a safe and highly rewarding bet. Hundreds of thousands of small-time investors rushed into the casino, many betting with money borrowed from Chinese state banks.
When the Shanghai index reached its highest point in mid-June, a Bloomberg analyst observed that the last year’s gain alone was “more than the $5 trillion size of Japan’s entire stock market. No other stock market has grown as much in dollar terms over a 12-month period”.
A steep, 40 percent plunge in the Shanghai index followed. Hundreds of thousands of Chinese investors posted huge losses and are now in debt. Many lost all their savings – a significant personal tragedy in a country with a poorly developed social security system.
Anger at the government’s failure to avoid the rout is building. Alert to the threat of stock market losers taking to the streets, Beijing has tried to deflect the blame towards stock market analysts and brokers. Authorities have made nearly 200 showcase arrests, even staging a televised “confession” by one business writer that he’d spread false rumours about the markets.
With the economic crisis deepening, the anger and resentment of those who were stripped bare of their savings are now joined to the fear of the unknown that’s stalking many in the middle class. Indeed, China’s modern middle class – which emerged only in the last quarter-century of rapid growth – has no experience with the grim prospects of a real economic downturn.
Added ingredients to this volatile brew are increasing mass protests by peasants and workers over a variety of grievances, including environmental pollution, land-grabbing by local authorities, and lack of workers’ rights. According to the China Labour Bulletin, strikes have become the “new normal” in China: There were some 1,378 workers’ strikes and protests in 2014 – more than double the 2013 figure and triple 2012’s.
What matters now is how the current government of Xi Jinping will manage citizens’ expectations in a period of much slower growth, increasing joblessness, greater inequality, and escalating discontent. Will it continue to tread softly around the powerful set of interests that have dominated society for 30 years? Or will it muster the courage to lead the way to a new development paradigm, one based on domestic consumption and greater equity?
This article has been excerpted from: ‘China’s stock market crash is the latest crisis of global capitalism’.
Courtesy: Commondreams.org