Fresh tremors shake financial markets
Monday, 15 February 2010.
Vincent Kolo and Chen Lizhi, chinaworker.info
On 12 February, just after financial markets in China closed for the lunar new year, the central bank (PBoC) announced another 0.5% rise in banks’ reserve requirements, to 16 percent for the country’s bigger banks. This rise, which takes effect on 25 February, was the second in a month and caught economic observers off guard.
“While the travails of Greece dominated headlines for much of the week, a further headwind came from China on Friday as the People’s Bank of China raised its reserve ratio requirement 50 basis points for the second time this year,” wrote the Financial Times (12 February).
Once again, developments in China are a big factor behind a new wave of uncertainty and pessimism among the speculators who rule the market. Given the huge weight of China, set to overtake Japan this year as the second biggest economy, this has heightened concerns among economic commentators about the fragility of global capitalism and fears of a “double dip” back into recession.
The other main cause of uncertainty has been growing fears of a European debt crisis, focused on the so-called ‘PIGS’ (Portugal, Ireland, Greece and Spain), and especially the risk of a sovereign default by Greece (that the southern European state cannot keep up payments on its national debt, which are heading this year towards 124% of GDP). Greek public sector workers have staged strikes against savage cuts in pay and pensions ordered by the “socialist” government in order to reduce the debt. As Marxists and the CWI predicted, the capitalists’ “exit” from the stimulus measures of the last 18 months would mean new, massive attacks on the working class internationally. In Ireland, public servants are facing 10% salary cuts and in Portugal, the government want to freeze salaries for five years! The working class and poor are being presented with the bill for ‘crisis fighting’ at the same time as big banks and speculators who caused the global crisis are again announcing huge profits and bonus payouts.
The latest problems in China are not so different from those that beset the 16-nation ‘eurozone’ and its weakest links – the ‘PIGS’. Current problems are rooted in a massive expansion of credit, arising from government attempts to overcome capitalism’s limitations and crises, and the debt overhang this has created. In China’s case, the problem is more recent, with a massive injection of bank lending especially in 2009 as a response to the collapse in overseas demand amid the global capitalist crisis that began in 2007. Despite stimulus-driven GDP growth of 8.7 percent last year, which many hail as “impressive” given the global downturn, the Chinese economy faces serious problems. Confirming what chinaworker.info has said about the global crisis and the Chinese regime’s policy response (huge stimulus spending), the South China Morning Post recently commented: “... the bill for achieving last year’s growth target is about to land on Beijing’s doormat.”
Since the start of this year it has become clear that China is suffering from financial “overstretch”. New bank loans totalled 9.6 trillion yuan last year, which equals an astonishing 29% of GDP. In January this year the pace of lending accelerated, with 1.39 trillion yuan in new loans agreed. That was more than during the previous three months combined. It also represented almost one-fifth of the central government’s entire lending target for 2010 of 7.5 trillion yuan. Much of this was the result of banks rushing out new deals in anticipation of an imminent clampdown by the government. No real surprises, therefore, when the government imposed a series of tightening measures that make China the first big economy to begin to “exit” from the mega-stimulus policies adopted globally since the end of 2008. The follow-up action on the eve of New Year, with a further rise in reserve requirements (the share of a bank’s capital that must be held in reserve), indicates that the central bank feels new lending is still increasing too fast.
Rather than the policy switch signalling, “mission accomplished”, however, these policies, which include tougher controls on banks and measures to cool the property sector, are driven by fears of an out-of-control asset bubble. This was the content of a World Bank warning last month. The US speculator James Chanos, who predicted the implosion of energy company Enron in 2001, has also warned that China is in the grips of a massive financial bubble – “Dubai times 1,000 – or worse” (Dubai was seen as a “miracle economy” until its real estate bubble crashed in November 2009, forcing a bailout by the United Arab Emirates). The Chinese government fears continued excessive lending by banks would worsen overcapacity, ignite inflation and lead to an upsurge in bad debts.
Official figures tell us prices for new houses rose 24% percent nationwide in 2009. But this almost certainly understates the real situation. Independent figures from real estate companies show the increase of house prices in large cities and developed areas was around 60% - 70% last year. Some richer provinces and cities recorded even bigger rises: 129% in Zhejiang province, 95% in Shenzhen and 88% in Beijing.
Several different factors explain the big surge in prices and divergence between government figures and those of the property companies. One factor is the increase in so-called “yin-yang contracts” in the second-hand housing market, where buyers and sellers agree secretly on a different (higher) price than the official price in order to avoid taxes. Other factors include the government concessions introduced in late 2008 to reignite the property market such as big discounts on loans to first-time buyers, and loan incentives for owners of second and third homes.
Yet other factors have fuelled property speculation at city and province level, such as the announcement that Shanghai will get a Disneyland and the designation of Hainan Province as an “International Tourist Destination” by the central government. This led to over 100 billion yuan of ‘hot money’ rushing into Hainan’s property market in three months (November 2009 – January 2010). In some areas property prices doubled within the space of 2 – 3 days. In the provincial capital of Haikou, prices in the ‘low-end’ property sector have reached 15,000 yuan per square metre, which is 140% of the average yearly income (11,600 yuan) for Hainan’s urban population. Yet according to official figures, only 20 billion yuan has entered into Hainan.
Bank of China (BOC), one of the “big four” commercial banks, cut its mortgage rate discount to first-time buyers as part of the new clampdown on excessive lending, and other banks could soon follow, raising borrowing costs for families that are already overextended. Already, mortgage defaults (people unable to pay back housing loans) are rising although no overall figures have been released. Fitch Ratings, a global rating agency (that grades the credit-worthiness of different institutions including banks) has issue several warnings about the effects of a housing bubble on China’s banking system. It recently warned that Chinese banks face the greatest bubble risks among their Asian peers.
“The agency believes the surges in both investment spending and credit growth are unsustainable. If unaddressed, this could lead to serious financial distress in the medium-term with sovereign rating implications,” Fitch warned on 14 January.
As Marxists have explained, the stimulus policies of the Chinese regime and their international counterparts have been of marginal benefit to workers and the poor. 85 percent of city families cannot afford to buy a house today. For these workers and some members of the new middle class it is no secret that the housing market is being driven primarily by wealthy speculators. Corrupt bureaucrats and speculators control dozens and even hundreds of properties for purely speculative purposes and personal luxury. A notorious example is Wen Qiang, the former deputy police chief in Chongqing, who is on trial on charges of protecting mafia-style gangs, bribery and rape. It has emerged that he owned 16 luxury properties, including a 2.2-acre villa.
Similarly, investment in the wider economy is largely chaotic, unplanned and speculative in nature. This has led to massive overcapacity in branches like steel, cement, glass, coke, wind turbines and shipbuilding [State Council list, September 2009]. The European Chamber of Commerce in China warned in a report last year of “a looming deluge” of extra cement capacity. This raises big questions about what China has to show for all this stimulus spending – which must be repaid unless the banks are to be thrown back into crisis as at the end of the 1990s. Huge excess capacity means lower profits as companies are pulled into a price-cutting war. This reduces their ability to invest in research and development and upgrade to higher valued-added production, prolonging the excessive technological dependence of the Chinese economy on foreign capital. Excess capacity also forces companies to resist wage increases, which in turn means less consumption, another major problem for the Chinese economy.
The socialist alternative to this madness is a democratic plan of production, with all major companies under the democratic control and management of the working class, and rural economies under the control of democratically run and state-subsidised farmers’ cooperatives. With independent and democratic workers’ organisations overseeing the election of all officials and managers subject to recall, and on this basis ruthlessly rooting out state and corporate corruption, it would be possible to channel the huge resources released over the last 14 months into socially necessary production. Democratic socialism would mean massive funding of rural infrastructure, safe drinking water, roads and electrification, affordable public housing, new schools without fees, as well as a big expansion of services and research in new technology. It would not mean more empty shopping malls, wasteful steelworks, seven-star hotels, prestige government offices and high-speed trains that only the rich can afford.
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