Global capitalism enters stage two of the crisis
Sunday, 23 May 2010.
Europe’s debt crisis drags world towards double dip recession • risk of a Chinese crash increases
[This article is from the Summer 2010 issue of Socialist (社会主义者) magazine produced by Chinese supporters of the CWI. To order the magazine write to cwi.china@gmail.com]
The global capitalist system is once again teetering on the edge of a severe financial crisis and economic downturn. The sovereign debt crisis in Europe – which threatens the break-up of the euro and even of the European Union – is causing shock waves worldwide. The very real prospect of defaults by Greece and larger countries such as Spain and Italy looms before us. This in turn could bring down major banks and unleash a new credit crunch even more deadly than the one triggered by the Lehman Brothers collapse 18 months ago. The fizzling out of the anaemic economic “recovery” of the past half-year in a “double dip” recession is now seen as a danger by governments and economists who only weeks ago dismissed such a scenario.
European events – the biggest workers’ protests in Greece for almost 40 years, draconian attacks on wages, pensions and jobs, and sharp clashes between governments – are all symptoms of a chronic disease of the capitalist system. The current phase of the crisis is aggravated by the very policies put in place as “the cure” for the earlier phase. To overcome the credit crunch and partial collapse of the global banking system, governments introduced unprecedented stimulus policies under a globally coordinated G20 plan. This prevented a more serious economic contraction at the time. Governments bailed out highly indebted banks and companies, in some cases nationalising them as a “temporary expedient”. But with the economy still organised on capitalist lines, blindly, with rival capitalist gangs putting short-term profits before the overall interests of society, then inevitably the distorted ‘keynesian’ rescue packages of 2008 and 2009 provided only a temporary reprieve.
As economist Nouriel Roubini explains, “The socialisation of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt. So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage.”
It is no longer banks but the governments themselves that need a bail out. The bailers have become the bailees. Rather than returning a favour, the ungrateful banks and financial institutions, still burdened by huge hidden losses, are doing their utmost to profit from and thereby worsen the crisis through frenzied speculation in the markets for government debt. In Europe, the most powerful states, Germany and France, are reluctantly supervising a bailout of the weaker states starting with Greece.
As socialists are at pains to explain, this is not a bail out for Greece or for the Greek people, who face savage austerity policies, but for the banks and the capitalist system itself. The banks of Germany and France own 70 percent of the Greek debt and risk being crippled by a Greek default i.e. cancellation of debt repayments. The euro is at risk and, with it, the global prestige and aspirations of the main European capitalist powers. French president Sarkozy threatened to pull out of the euro currency if German leaders did not sign up for the latest EU ‘rescue package’ for Greece, Portugal, Spain and other weak-link economies. Merkel, the German Chancellor, spelt out what this could mean when she said, “This challenge is existential and we have to rise to it. The euro is in danger … If the euro fails, then Europe fails.”
Such would be the economic dislocation to Europe’s economies in the event of the capitalist monetary and currency union unravelling, with each government attempting to cut their own losses at their neighbours’ expense, that the European Union might not hold together. Massive social pressure and anti-EU sentiment could force governments to break away. On a capitalist basis this would likely be accompanied by an upsurge in nationalism and attacks on the “foreign causes” of the crisis.
The perilous condition of capitalist Europe explains the nearly-$1 trillion European Stabilization Fund (ESF) launched in early May by the EU and IMF to “calm markets” (i.e. the banks and hedge funds) in an attempt to prevent the financial contagion from spreading. This unprecedented package of emergency loans, debt purchases and bank guarantees was Europe’s equivalent to the “bazooka” produced by former US Treasury Secretary Hank Paulson after the collapse of Lehman Brothers – the $700 billion “TARP” plan to buy up the toxic or “troubled assets” accumulated by the US banking system. It remains to be seen if Europe’s “bazooka” can stabilise the situation – the initial reaction of the market is further speculation against the euro.
As before, this is a global crisis. It is not isolated to Europe any more than the ‘subprime’ crisis was solely an American affair. And as Roubini points out this is potentially far more serious than that phase of the crisis. The interconnectedness of capitalism is fully revealed. Greece only accounts for one-fortieth of the eurozone economy and yet its debt crisis threatens a full-blown European and even global financial crisis.
At the end of 2009, Europe’s banks had $2.29 trillion at risk in Greece, Italy, Portugal and Spain. Most exposed are French banks with claims of $843 billion (money that would be lost in the event of a series of sovereign defaults). But US banks are also heavily exposed. It is estimated that JPMorgan Chase alone has $1.4 trillion of exposure across all of Europe, while Citigroup Inc. has $468.4 billion. Not surprisingly the Obama administration pushed hard for the EU/IMF to produce its “bazooka”.
Across Europe governments are going on a massive offensive against the working class. This was also something that the socialists of the Committee for a Workers’ International (cwi) warned would happen when the stimulus programmes were unveiled 18 months ago. In Greece wages are to be cut by 20-25 percent and unemployment could double to one in five of the workforce by next year. Spain, also ruled by a so called “socialist” government plans the biggest budget reductions for 30 years. As the articles on our website www.chinaworker.info and in the current issue of Shehui Zhuyi Zhe show, the cwi is straining every nerve to intervene in the unfolding mass fightback and help clarify the political tasks, slogans and tactics needed for success.
What is happening in Europe now is a foretaste of what will come in Asia tomorrow. In the US, the situation at state level already looks distinctly “European”. Washington Post columnist Michael Gerson warns, “Some large states, such as California and New York, are on the verge of default. They will achieve major spending reductions only by cutting their pension and public employee pay levels. This will set up a serious battle between state governments and the labour movement.”
Capitalist parties and commentators are not talking about a few tough years but of an “age of austerity”. Unless workers organise, prepare and fight then an unending wave of attacks lies ahead. In the case of Japan, a recent study from the Swiss institute IMD speaks of “70 years of austerity” – that it would take until 2084 for Japan to reduce its state debt, currently 189 percent of GDP, to a “normal” level of 60 percent. The capitalists are cooking up plans to impoverish the working class and take back the gains of half a century of trade union and political struggle.
China has been lauded by the capitalists as one of the main factors behind the global “recovery”. The stimulus measures of the last 18 months are credited with restoring it to a top placing in the GDP growth league (8.7 percent last year and 11.9 percent in the first quarter of this year). Global demand from China, especially for raw materials, has boosted economies in Asia and Africa and cushioned them to some extent against the recession. But could China now be heading for an economic hard landing? Has its credit-driven escape from recession at the end of 2008 produced similar problems to those we see elsewhere?
The Chinese dictatorship is currently grappling with a massive property bubble that poses a threat to the banking system along similar lines to what happened in the US. The regime has accomplished a similar feat to Alan Greenspan, the former US central banker, who created a series of asset bubbles, each one as a “solution” to the problems created by its forerunner. For two decades from the mid 1980s these policies created an illusion of wealth in the US and drove record levels of consumption even as real wages declined.
In the last 16 months China’s banks have made new loans totalling 13 trillion yuan under a policy of ultra-loose credit adopted by the regime in the face of the global crisis. This is an unprecedented credit expansion for any country. “When measured relative to the size of its economy, the 27 percent point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending,” comments hedge fund manager Hugh Hendry. He predicts the credit bubble will burst triggering “a much greater crisis elsewhere in the world”.
These policies were undertaken to stimulate domestic consumption in order to offset the slump in exports. Rather than increase wages and the share of the national economic cake that goes to the working class, a policy that would be resisted by companies and regional governments that account for most investments, Chinese officials especially at regional and city level took a leaf from Greenspan’s book and other neo-liberal witch doctors and used the housing market to drive economic growth. The share of China’s GDP going to labour has fallen from 17 percent in the 1980s to 11 percent. The puppet trade union federation ACFTU recently revealed that 23.7 percent of workers have not had a pay rise for five years.
The property market by contrast has experienced an explosive growth. HSBC estimate that the total value of China’s housing stock based on current market prices now exceeds 109 trillion yuan, which is nearly 3.3 times GDP. This is almost double the peak ratio attained in the US during the ‘subprime’ housing boom and almost at the level reached during Japan’s bubble economy of the late 1980s. In just seven years the value of China’s stock of residential properties has soared from negligible levels. Last year, for example, as the US housing market continued its downward spiral, around 8 million new homes were sold in China compared to 500,000 in the US.
The banking system in China is built around low interest rates on deposits, which are negative in real terms. The middle class and more well paid workers therefore look to store their savings in property and to a lesser extent the (falling) stock market. Under stimulus policies launched by Premier Wen Jiabao at the end of 2008, mortgages became cheaper and easier to acquire. In Shanghai, new mortgages rose by 1,600 percent in 2009 (from 5.8 billion in 2008 to almost 100 billion yuan). This liquidity driven housing boom pushed prices to record levels. House prices in Shanghai and Beijing doubled in less than four years before the onset of the global capitalist crisis and have doubled again since. But “Prices in second- and third-tier cities are increasing more dramatically than in the first-tier,” says Cao Jianhai of the Chinese Academy of Social Sciences. “It’s very dangerous and it puts local banks at risk”.
The property bubble has accentuated China’s staggering wealth gap. Only 20 countries – all in Africa or Latin America – have a more unequal division of wealth than the “people’s republic”. The income gap between the wealthiest tenth of the population and the poorest tenth has risen to 23 times in 2007 from 7.3 times in 1988, reported Global Times (10 May 2010). The same journal (an adjunct of Xinhua News Agency) revealed that senior managers’ incomes at state-owned enterprises (SOEs) are 128 times higher than the average wage in the whole country.
Inequality in China has breached the “red line” danger limit established by the World Bank to warn over social and political instability. This uses the so called Gini index, an international measurement of income inequality. “China’s Gini index has seen consecutive rises after it exceeded the international warning line of 0.4 ten years ago, and the country’s poverty gap has broken the limit line,” said Chang Xiuze, an expert at the Academy of Macroeconomic Research (AMR) of the National Development and Reform Commission (NDRC). The latest Gini index for China is 0.48, which compares to 0.42 in Russia and 0.37 in India (the lower the figure, the more equal the wealth distribution).
CASS estimates that 85 percent of the population cannot afford to buy an apartment even on the concessionary lending terms the central government introduced in late 2008, which it has now abandoned. There are between 10-20 million empty apartments in China, a unique phenomenon. Beijing and Shanghai are famous for housing blocks with barely a single lit-up apartment at night time. These flats are speculative objects rather than homes. Yet hundreds of millions are forced to live in cramped and substandard housing.
Property prices are being driven by rampant, systemic speculation. Whether the central government can bring this under control remains to be seen. The quite draconian policies of recent weeks (tighter lending rules for banks, withdrawal of lower mortgage terms and restrictions on land hoarding by developers) have led to a dramatic slowdown in housing sales and flight of capital from the property sector. There is the risk that the measures are “too effective” but, equally, that after a short standoff the property bubble grows again.
“Powerful interest groups have paralysed China’s macro policy,” says economist Andy Xie. Corrupt officials, major state-owned companies, local governments and capitalist entrepreneurs, all have a major stake in perpetuating the price rise carousel. In March, as the central government began efforts to rein in the speculators, 78 centrally state-owned enterprises (SOEs) including some of China’s biggest companies were banned from the property market, although they are not forced to relinquish existing land holdings which are substantial. The role of SOEs in bidding up land prices for financial gain has been a key factor in the price surges of the last year. But 16 SOEs for whom property is deemed a “core interest” are not affected by the new ruling. These 16 companies, which are set to gain as their rivals are pushed out of the market, accounted for 86 percent of all SOE earnings from property sales in 2009. So, the new rules for SOEs will only have a limited effect.
Xie argues current trends in China resemble “the final frenzy in financial mania” i.e. just before a bubble bursts as witnessed in other countries: “The consequences may well be catastrophic – as Japan showed 20 years ago, Southeast Asia 10 years ago, and the US is demonstrating now.” Members of China’s middle class have been emptying their savings accounts and borrowing to the hilt in order to get into the property market. There are reports of couples getting divorced to circumvent new government limits that stipulate “one family, one apartment”. One 27-year old in Hefei confessed “For people of my generation property is all we talk about.”
There are soothing voices from among the capitalist economists who point to statistics showing China’s low debt levels in comparison to other regions. Chinese household debt amounts to 17 percent of GDP as opposed to 96 percent in the US and 62 percent in the eurozone, based on official figures. China’s state debt is also modest when compared to Greece or Japan. But are such comparisons, based on official statistics, reliable? One of the features of China’s massive credit-driven construction boom of the last 18 months has been the proliferation of local government financial entities – UDICs (urban development investment corporations). There are now 8,000 such companies, where hardly any existed just a couple of years ago. Local governments are prohibited by law from taking on debt and therefore these off-balance-sheet vehicles – similar to those set up by Western banks to remove ‘subprime’ loans from their balance sheets – have been set up to enable them to access bank credit and play the property market.
The UDICs are believed to have run up bank debts of between 8 to 11 trillion yuan to finance local government-sponsored infrastructure projects many of which could go sour especially in the event of a property sector crash. According to Victor Shih of Northwestern University in the US, the combined debts of such local government-linked entities could reach 24 trillion yuan by the end of this year, which is equivalent to two-thirds of GDP. In Chongqing, China’s largest city, local government debt has soared to 200 percent of its annual revenue – a level that parallels the Greek government’s problems!
Local government investment companies have been instrumental in driving up land prices – using higher land prices to boost their collateral and take on more loans. In short, a local government debt crisis could be in the offing, with Nomura of Japan warning that bad debts in the banking system could rapidly rise to 20 percent from negligible levels today, necessitating a government bailout. A similar situation arose in 1998, forcing the government to bailout the banks, but at that time the global economy was still growing and China could export its way out of crisis.
It is not possible to predict with any precision when China’s property bubble will burst, but it seems this is only a question of time. The latest government restrictions are unlikely to induce a controlled slowdown, but could under certain conditions trigger a slump with similar effects to the bursting of the US housing bubble.
Such objectively is the bankruptcy of the current regime – its dependence on an economic system that has already caused damage on a spectacular scale. Capitalism is diseased and no amount of government regulation can cure it. Only the abolition of capitalism through the transfer of power in society and control over the biggest companies and banks to the working class, on a democratic socialist and planned basis, can offer a real solution.
[This article is from the Summer 2010 issue of Socialist (社会主义者) magazine produced by Chinese supporters of the CWI. To order the magazine write to cwi.china@gmail.com]
The global capitalist system is once again teetering on the edge of a severe financial crisis and economic downturn. The sovereign debt crisis in Europe – which threatens the break-up of the euro and even of the European Union – is causing shock waves worldwide. The very real prospect of defaults by Greece and larger countries such as Spain and Italy looms before us. This in turn could bring down major banks and unleash a new credit crunch even more deadly than the one triggered by the Lehman Brothers collapse 18 months ago. The fizzling out of the anaemic economic “recovery” of the past half-year in a “double dip” recession is now seen as a danger by governments and economists who only weeks ago dismissed such a scenario.
European events – the biggest workers’ protests in Greece for almost 40 years, draconian attacks on wages, pensions and jobs, and sharp clashes between governments – are all symptoms of a chronic disease of the capitalist system. The current phase of the crisis is aggravated by the very policies put in place as “the cure” for the earlier phase. To overcome the credit crunch and partial collapse of the global banking system, governments introduced unprecedented stimulus policies under a globally coordinated G20 plan. This prevented a more serious economic contraction at the time. Governments bailed out highly indebted banks and companies, in some cases nationalising them as a “temporary expedient”. But with the economy still organised on capitalist lines, blindly, with rival capitalist gangs putting short-term profits before the overall interests of society, then inevitably the distorted ‘keynesian’ rescue packages of 2008 and 2009 provided only a temporary reprieve.
As economist Nouriel Roubini explains, “The socialisation of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt. So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage.”
It is no longer banks but the governments themselves that need a bail out. The bailers have become the bailees. Rather than returning a favour, the ungrateful banks and financial institutions, still burdened by huge hidden losses, are doing their utmost to profit from and thereby worsen the crisis through frenzied speculation in the markets for government debt. In Europe, the most powerful states, Germany and France, are reluctantly supervising a bailout of the weaker states starting with Greece.
As socialists are at pains to explain, this is not a bail out for Greece or for the Greek people, who face savage austerity policies, but for the banks and the capitalist system itself. The banks of Germany and France own 70 percent of the Greek debt and risk being crippled by a Greek default i.e. cancellation of debt repayments. The euro is at risk and, with it, the global prestige and aspirations of the main European capitalist powers. French president Sarkozy threatened to pull out of the euro currency if German leaders did not sign up for the latest EU ‘rescue package’ for Greece, Portugal, Spain and other weak-link economies. Merkel, the German Chancellor, spelt out what this could mean when she said, “This challenge is existential and we have to rise to it. The euro is in danger … If the euro fails, then Europe fails.”
Such would be the economic dislocation to Europe’s economies in the event of the capitalist monetary and currency union unravelling, with each government attempting to cut their own losses at their neighbours’ expense, that the European Union might not hold together. Massive social pressure and anti-EU sentiment could force governments to break away. On a capitalist basis this would likely be accompanied by an upsurge in nationalism and attacks on the “foreign causes” of the crisis.
The perilous condition of capitalist Europe explains the nearly-$1 trillion European Stabilization Fund (ESF) launched in early May by the EU and IMF to “calm markets” (i.e. the banks and hedge funds) in an attempt to prevent the financial contagion from spreading. This unprecedented package of emergency loans, debt purchases and bank guarantees was Europe’s equivalent to the “bazooka” produced by former US Treasury Secretary Hank Paulson after the collapse of Lehman Brothers – the $700 billion “TARP” plan to buy up the toxic or “troubled assets” accumulated by the US banking system. It remains to be seen if Europe’s “bazooka” can stabilise the situation – the initial reaction of the market is further speculation against the euro.
As before, this is a global crisis. It is not isolated to Europe any more than the ‘subprime’ crisis was solely an American affair. And as Roubini points out this is potentially far more serious than that phase of the crisis. The interconnectedness of capitalism is fully revealed. Greece only accounts for one-fortieth of the eurozone economy and yet its debt crisis threatens a full-blown European and even global financial crisis.
At the end of 2009, Europe’s banks had $2.29 trillion at risk in Greece, Italy, Portugal and Spain. Most exposed are French banks with claims of $843 billion (money that would be lost in the event of a series of sovereign defaults). But US banks are also heavily exposed. It is estimated that JPMorgan Chase alone has $1.4 trillion of exposure across all of Europe, while Citigroup Inc. has $468.4 billion. Not surprisingly the Obama administration pushed hard for the EU/IMF to produce its “bazooka”.
Across Europe governments are going on a massive offensive against the working class. This was also something that the socialists of the Committee for a Workers’ International (cwi) warned would happen when the stimulus programmes were unveiled 18 months ago. In Greece wages are to be cut by 20-25 percent and unemployment could double to one in five of the workforce by next year. Spain, also ruled by a so called “socialist” government plans the biggest budget reductions for 30 years. As the articles on our website www.chinaworker.info and in the current issue of Shehui Zhuyi Zhe show, the cwi is straining every nerve to intervene in the unfolding mass fightback and help clarify the political tasks, slogans and tactics needed for success.
What is happening in Europe now is a foretaste of what will come in Asia tomorrow. In the US, the situation at state level already looks distinctly “European”. Washington Post columnist Michael Gerson warns, “Some large states, such as California and New York, are on the verge of default. They will achieve major spending reductions only by cutting their pension and public employee pay levels. This will set up a serious battle between state governments and the labour movement.”
Capitalist parties and commentators are not talking about a few tough years but of an “age of austerity”. Unless workers organise, prepare and fight then an unending wave of attacks lies ahead. In the case of Japan, a recent study from the Swiss institute IMD speaks of “70 years of austerity” – that it would take until 2084 for Japan to reduce its state debt, currently 189 percent of GDP, to a “normal” level of 60 percent. The capitalists are cooking up plans to impoverish the working class and take back the gains of half a century of trade union and political struggle.
China has been lauded by the capitalists as one of the main factors behind the global “recovery”. The stimulus measures of the last 18 months are credited with restoring it to a top placing in the GDP growth league (8.7 percent last year and 11.9 percent in the first quarter of this year). Global demand from China, especially for raw materials, has boosted economies in Asia and Africa and cushioned them to some extent against the recession. But could China now be heading for an economic hard landing? Has its credit-driven escape from recession at the end of 2008 produced similar problems to those we see elsewhere?
The Chinese dictatorship is currently grappling with a massive property bubble that poses a threat to the banking system along similar lines to what happened in the US. The regime has accomplished a similar feat to Alan Greenspan, the former US central banker, who created a series of asset bubbles, each one as a “solution” to the problems created by its forerunner. For two decades from the mid 1980s these policies created an illusion of wealth in the US and drove record levels of consumption even as real wages declined.
In the last 16 months China’s banks have made new loans totalling 13 trillion yuan under a policy of ultra-loose credit adopted by the regime in the face of the global crisis. This is an unprecedented credit expansion for any country. “When measured relative to the size of its economy, the 27 percent point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending,” comments hedge fund manager Hugh Hendry. He predicts the credit bubble will burst triggering “a much greater crisis elsewhere in the world”.
These policies were undertaken to stimulate domestic consumption in order to offset the slump in exports. Rather than increase wages and the share of the national economic cake that goes to the working class, a policy that would be resisted by companies and regional governments that account for most investments, Chinese officials especially at regional and city level took a leaf from Greenspan’s book and other neo-liberal witch doctors and used the housing market to drive economic growth. The share of China’s GDP going to labour has fallen from 17 percent in the 1980s to 11 percent. The puppet trade union federation ACFTU recently revealed that 23.7 percent of workers have not had a pay rise for five years.
The property market by contrast has experienced an explosive growth. HSBC estimate that the total value of China’s housing stock based on current market prices now exceeds 109 trillion yuan, which is nearly 3.3 times GDP. This is almost double the peak ratio attained in the US during the ‘subprime’ housing boom and almost at the level reached during Japan’s bubble economy of the late 1980s. In just seven years the value of China’s stock of residential properties has soared from negligible levels. Last year, for example, as the US housing market continued its downward spiral, around 8 million new homes were sold in China compared to 500,000 in the US.
The banking system in China is built around low interest rates on deposits, which are negative in real terms. The middle class and more well paid workers therefore look to store their savings in property and to a lesser extent the (falling) stock market. Under stimulus policies launched by Premier Wen Jiabao at the end of 2008, mortgages became cheaper and easier to acquire. In Shanghai, new mortgages rose by 1,600 percent in 2009 (from 5.8 billion in 2008 to almost 100 billion yuan). This liquidity driven housing boom pushed prices to record levels. House prices in Shanghai and Beijing doubled in less than four years before the onset of the global capitalist crisis and have doubled again since. But “Prices in second- and third-tier cities are increasing more dramatically than in the first-tier,” says Cao Jianhai of the Chinese Academy of Social Sciences. “It’s very dangerous and it puts local banks at risk”.
The property bubble has accentuated China’s staggering wealth gap. Only 20 countries – all in Africa or Latin America – have a more unequal division of wealth than the “people’s republic”. The income gap between the wealthiest tenth of the population and the poorest tenth has risen to 23 times in 2007 from 7.3 times in 1988, reported Global Times (10 May 2010). The same journal (an adjunct of Xinhua News Agency) revealed that senior managers’ incomes at state-owned enterprises (SOEs) are 128 times higher than the average wage in the whole country.
Inequality in China has breached the “red line” danger limit established by the World Bank to warn over social and political instability. This uses the so called Gini index, an international measurement of income inequality. “China’s Gini index has seen consecutive rises after it exceeded the international warning line of 0.4 ten years ago, and the country’s poverty gap has broken the limit line,” said Chang Xiuze, an expert at the Academy of Macroeconomic Research (AMR) of the National Development and Reform Commission (NDRC). The latest Gini index for China is 0.48, which compares to 0.42 in Russia and 0.37 in India (the lower the figure, the more equal the wealth distribution).
CASS estimates that 85 percent of the population cannot afford to buy an apartment even on the concessionary lending terms the central government introduced in late 2008, which it has now abandoned. There are between 10-20 million empty apartments in China, a unique phenomenon. Beijing and Shanghai are famous for housing blocks with barely a single lit-up apartment at night time. These flats are speculative objects rather than homes. Yet hundreds of millions are forced to live in cramped and substandard housing.
Property prices are being driven by rampant, systemic speculation. Whether the central government can bring this under control remains to be seen. The quite draconian policies of recent weeks (tighter lending rules for banks, withdrawal of lower mortgage terms and restrictions on land hoarding by developers) have led to a dramatic slowdown in housing sales and flight of capital from the property sector. There is the risk that the measures are “too effective” but, equally, that after a short standoff the property bubble grows again.
“Powerful interest groups have paralysed China’s macro policy,” says economist Andy Xie. Corrupt officials, major state-owned companies, local governments and capitalist entrepreneurs, all have a major stake in perpetuating the price rise carousel. In March, as the central government began efforts to rein in the speculators, 78 centrally state-owned enterprises (SOEs) including some of China’s biggest companies were banned from the property market, although they are not forced to relinquish existing land holdings which are substantial. The role of SOEs in bidding up land prices for financial gain has been a key factor in the price surges of the last year. But 16 SOEs for whom property is deemed a “core interest” are not affected by the new ruling. These 16 companies, which are set to gain as their rivals are pushed out of the market, accounted for 86 percent of all SOE earnings from property sales in 2009. So, the new rules for SOEs will only have a limited effect.
Xie argues current trends in China resemble “the final frenzy in financial mania” i.e. just before a bubble bursts as witnessed in other countries: “The consequences may well be catastrophic – as Japan showed 20 years ago, Southeast Asia 10 years ago, and the US is demonstrating now.” Members of China’s middle class have been emptying their savings accounts and borrowing to the hilt in order to get into the property market. There are reports of couples getting divorced to circumvent new government limits that stipulate “one family, one apartment”. One 27-year old in Hefei confessed “For people of my generation property is all we talk about.”
There are soothing voices from among the capitalist economists who point to statistics showing China’s low debt levels in comparison to other regions. Chinese household debt amounts to 17 percent of GDP as opposed to 96 percent in the US and 62 percent in the eurozone, based on official figures. China’s state debt is also modest when compared to Greece or Japan. But are such comparisons, based on official statistics, reliable? One of the features of China’s massive credit-driven construction boom of the last 18 months has been the proliferation of local government financial entities – UDICs (urban development investment corporations). There are now 8,000 such companies, where hardly any existed just a couple of years ago. Local governments are prohibited by law from taking on debt and therefore these off-balance-sheet vehicles – similar to those set up by Western banks to remove ‘subprime’ loans from their balance sheets – have been set up to enable them to access bank credit and play the property market.
The UDICs are believed to have run up bank debts of between 8 to 11 trillion yuan to finance local government-sponsored infrastructure projects many of which could go sour especially in the event of a property sector crash. According to Victor Shih of Northwestern University in the US, the combined debts of such local government-linked entities could reach 24 trillion yuan by the end of this year, which is equivalent to two-thirds of GDP. In Chongqing, China’s largest city, local government debt has soared to 200 percent of its annual revenue – a level that parallels the Greek government’s problems!
Local government investment companies have been instrumental in driving up land prices – using higher land prices to boost their collateral and take on more loans. In short, a local government debt crisis could be in the offing, with Nomura of Japan warning that bad debts in the banking system could rapidly rise to 20 percent from negligible levels today, necessitating a government bailout. A similar situation arose in 1998, forcing the government to bailout the banks, but at that time the global economy was still growing and China could export its way out of crisis.
It is not possible to predict with any precision when China’s property bubble will burst, but it seems this is only a question of time. The latest government restrictions are unlikely to induce a controlled slowdown, but could under certain conditions trigger a slump with similar effects to the bursting of the US housing bubble.
Such objectively is the bankruptcy of the current regime – its dependence on an economic system that has already caused damage on a spectacular scale. Capitalism is diseased and no amount of government regulation can cure it. Only the abolition of capitalism through the transfer of power in society and control over the biggest companies and banks to the working class, on a democratic socialist and planned basis, can offer a real solution.
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