http://wsws.org/articles/2008/aug2008/chin-a13_prn.shtml
WSWS : News & Analysis : Asia : China
Inflation, manufacturing contraction and property bubble haunts Chinese
government
By John Chan
13 August 2008
Recent figures on the Chinese economy demolish claims that the country’s
rapid growth would allow it to “decouple” from the US financial crisis.
In fact, an emergency meeting of the Chinese Communist Party (CCP)
Politburo on July 25 called for urgent action to combat slowing growth,
rising inflation and a serious decline in exports to US and European
markets.
A statement issued after the meeting declared: “China is facing
increasing challenges in maintaining fast and stable economic growth
amid growing international uncertainties and domestic economic
difficulties.”
In the second quarter of 2008 China’s gross domestic product (GDP)
growth rate slowed to 10.1 percent, down from 11.9 percent for the whole
of 2007. Year-on-year based export growth also fell sharply in June to
17.6 percent, compared to 28.1 percent in May. The consumer price index
(CPI) rose 7.1 percent in June—down from a decade high of 8.7 percent in
February. However, the producer price index hit 8.8 percent, raising
fears that it will be translated into higher CPI in the second half of
the year.
Analysts have pointed out that Beijing’s emphasis on the economy just
two weeks before the Olympic Games indicated the seriousness of the
situation. The Politburo meeting also marked a shift from its previous
stress over recent years on attempting to control economic “overheating”
and high rates of growth.
According to the South China Morning Post, the Politburo meeting was
held after fact-finding tours by top CCP leaders to China’s economic
growth centres; where local officials have complained bitterly about
weak export markets, increasing raw material costs and the rising value
of the yuan against the US dollar.
The Guangdong economy grew 10.7 percent in the first half of the
year—3.6 percent lower than a year ago. Some 2,331 shoe factories have
closed in the first five months of the year with many firms relocating
to low-cost production centres in Vietnam and India. Shanghai grew 10.3
percent, down 2.7 percent from 2007. In Zhejiang, 20 percent of the
private firms in two leading manufacturing-export cities, Wenzhou and
Yiwu, have stopped production.
The situation in eastern Zhejiang province typifies the manufacturing
crisis. In the first five months of the year, nearly one fifth of local
firms reported losses due to higher interest rates and the rising costs
of raw materials and transport. With an average profit margin of just
4.3 percent, 90 percent of exporters can only tolerate yuan appreciation
of less than 5 percent. The yuan, however, has appreciated 6.56 percent
against the dollar since the beginning of 2008.
The Shanghai-based Oriental Morning Post reported on June 19 that the
province’s “Wenzhou model”, once hailed as an example of China’s export
miracle, is struggling, with 60,000 firms in the province or 20 percent
of the total now on the verge of bankruptcy. The Post pointed out that
local enterprises have focussed on expanding their volumes and trimming
margins to undercut competition at the expense of developing their own
technology. Most are family-run businesses, often developed by well-off
peasants. These poorly-educated factory owners, who are reluctant to
accept modern management methods, are the most vulnerable to sudden
economic changes.
Small and medium enterprises have also been particularly hard hit by the
tight monetary policies to fight inflation, such as restrictions on bank
lending. Commenting on the decline of manufacturing output, Xing
Ziqiang, an economist with China International Capital Corp, the
country’s largest investment bank, told Bloomberg: “The size of the
slowdown is unexpected. The government may use a more active fiscal
policy, slowing gains by the yuan, and encourage lending to small
companies.”
Such pro-growth measures, however, are likely to compound inflation
problems, as a weak yuan will increase imported raw material costs, such
as oil and iron ore, which are priced in US dollars. A more active
fiscal policy, such as increasing state investment in infrastructure
projects will stimulate growth, but also add to the inflationary pressure.
President Hu Jintao has singled out inflation as China’s biggest
challenge, reflecting the CCP leadership’s fear of its explosive
political implications. Some new studies estimate that in 1989, high
inflation propelled 100 million people, mainly urban workers, into
anti-government protests throughout China. The movement was only ended
with the brutal military suppression of mass protests in Tiananmen
Square. Under conditions where the working class has grown exponentially
since 1989, Beijing is fearful that social unrest will erupt again on a
far broader scale.
China’s industrial expansion in recent years has been fuelled by the
debt-driven consumption in the US. During this boom President Hu called
for a transition to a Chinese economy based on increased domestic
consumption and the creation of world-class Chinese corporations in
place of low-tech, labour-intensive assembly line production. Beijing
leaders complained that huge exports were causing trade tensions with
the US and EU and suggested that the most polluting industries should be
cut to save the environment. A labour-contract law was enacted in
January requiring employers to provide more stable long-term employment
and other benefits for workers.
With major export markets in US, Europe and Japan in trouble, these
promises are in question. Chinese businesses are now pressuring Beijing
to reverse cuts on tax rebates on exports, slow down the yuan
appreciation against the dollar and scrap the new labour law. In fact,
the labour law is coming into direct conflict with the flexible “hire
and fire” principle in export production cycles and has already been
flouted by many businesses. It is now possible that the legislation will
be completely scrapped in order to preserve China’s status as the
premier sweatshop of the world.
Beijing has already raised the tax rebates on exports of textiles and
garments from 11 percent to 13 percent on August 1. The Peoples Bank of
China also told commercial banks that it was loosening its tight control
of lending and would intervene to slow the yuan’s rise in order to
protect the export industry.
Zhang Yansheng, senior economist at the National Development and Reform
Commission, told Reuters that the strong yuan policy, which began with
the abolition of the peg of the yuan against the dollar in 2005, was
coming to an end. “Over the past few years, expectations for yuan
appreciation have been based on economic growth and a huge trade
surplus. The fundamental situation facing China’s economy and trade has
now changed and so will expectations for currency policy and exchange
rates,” he said.
Although China’s 9-plus percent annual growth rate is still high by
world standards, it is not enough to achieve Beijing’s aim of creating
10-20 million jobs per year in order to prevent rising unemployment and
maintain social stability.
The financial magazine Caijing noted on July 21 that China faced serious
employment distress this year with a record number of college graduates
(5.59 million), a series of natural disasters including the Sichuan
earthquake in May, closures of state-owned enterprises, generally low
skills of the workforce—which no longer meet the demands of business—and
growing global economic uncertainties.
Caijing also pointed out that rising productivity was leading to a
declining capacity to generate jobs. From 2001-2005, the average annual
number of new jobs created was 560,000 less than from 1996-2000, even
though the average annual growth rate in the earlier period was one
percent slower. China is expected to only create 40 million new jobs by
2010, compared to an estimate rise of 50 million in the urban workforce.
The “surplus” workers will join the existing large army of the unemployed.
Already, as part of a four-year program, more than 2,000 indebted state
enterprises will declare bankruptcy this year and lay off large numbers
of workers. The largest state-run oil giant, China National Petroleum
Corp (CNPC), announced in July that it will cut 5 percent of its total
workforce or 83,500 jobs after posting a 39 percent decline in pre-tax
profit in the first half of the year. The losses were produced by the
fact that domestic fuel prices are capped amid surging global oil prices.
On top of the manufacturing crisis there is growing financial
instability. The declining US dollar is driving a flood of speculative
“hot money” into China, especially the property markets. Speculators,
who lack confidence in the US financial markets, are betting on a
further appreciation of the yuan and inflationary pressures forcing the
Chinese central bank to lift interest rates. The country’s foreign
currency reserves reached $1.81 trillion by June, up from $1.53 trillion
in March. Economists have warned that a large proportion of the increase
($200 billion in the first five months, according to one estimate) is
speculative capital.
Beijing has instructed banks to tighten mortgage lending after the US
government bailed out two housing mortgage giants, Fannie Mae and
Freddie Mac, in July. There are concerns that China’s housing market is
in danger of meltdown. By the end of June, average property prices in
China’s 70 largest cities were up 12 percent from a year ago, but sales
in major centres such as Shanghai, Shenzhen and Beijing, have fallen
sharply.
Yi Xianrong, a leading economist of the official Chinese Academy of
Social Sciences told the Financial Times on July 23: “If financial
institutions of Freddie Mac and Fannie Mae’s calibre could get into such
a bad situation, then what does that mean for Chinese financial
institutions? The only reason we haven’t seen similar problems here is
because property prices have continued to rise rapidly.” Yi explained
that Chinese mortgage lending criteria were loose, due to the rampant
speculation and insider dealings with the bank officials. “Anyone can
get a mortgage loan in China, no matter who they are,” he said.
Speculative capital is also concentrating in real estate because of
dwindling stock market returns. As in other Asian countries, following
the US financial shocks the key Shanghai Composite Index has fallen
drastically from the peak level of more than 6,100 points last October
to just 2,600 in July. The market is so fragile that any major issue of
new shares could trigger more sell orders. The China Security Regulator
Commission (CSRC) has turned down a third of initial public offerings
(IPO) in July in order to stabilise the market.
Growing concern about financial instability is indicated by CSRC’s
instruction to local fund managers not to make negative comments about
the share markets. “Fund company executives, fund managers and other
important staff should be very careful about their speeches and blog
content, which may cause market fluctuations,” it declared. The
authorities have also urged top executives at local managed funds and
securities brokerage firms not to go overseas until after the Olympic Games.
These attempts to provide stability cannot alter the fundamental
contradictions facing the Chinese regime. After integrating China into
the global economy over the past 30 years, Beijing is powerless before
the vast forces of international capital now dominating the country’s
industrial production and financial system.
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