China: Xi’s third term – part two: property, debt and common prosperity

In part one of my analysis of China’s economic future, I dealt with the claims that China would slow towards stagnation because its investment rate was too high, the working population was falling fast and the economy needed to become like mature Western capitalist economies based on consumption-led growth.  I argued that the Western capitalist model was hardly great shakes, given its regular and recurring crises and the much lower levels of consumption growth.  Anyway, in an economy, consumption does not lead investment and national output.  On the contrary, it is investment that leads in capitalist economies just as much as in China.

The reason that Western analysts are so sceptical of the Chinese model is that they are seeped in a different economic model for growth.  They are convinced that China can only be ‘successful’ (like the economies of the G7!) if its economy depends on profitable investment by privately-owned companies in a ‘free market’.  And yet the evidence of the last 40 and even 70 years is that a state-led, planning economic model that is China’s has been way more successful than its ‘market economy’ peers such as India, Brazil or Russia -and even the G7.

The lessons of the global financial crash and the Great Recession of 2009, the ensuing long depression to 2019 and the economic impact of the pandemic slump are that introducing more capitalist production for profit will not sustain economic growth and certainly not deliver ‘common prosperity’.  The real question is whether that investment is productive of new value or is wasted on unproductive consumption, eg property and financial speculation; and military spending. 

And on this issue, it is China’s large capitalist sector that threatens China’s future prosperity.  The real problem is that in the last ten years (and even before) the Chinese leaders have allowed a massive expansion of unproductive and speculative investment by the capitalist sector of the economy.  In the drive to build enough houses and infrastructure for the sharply rising urban population, central and local governments left the job to private developers.  Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale.  Of course, homes needed to be built, but as President Xi put it belatedly, “homes are for living in, not for speculation.” 

Beijing wanted houses and local officials wanted revenue. The capitalist housing projects helped deliver both.  But the result was a huge rise in house prices in the major cities and a massive expansion of debt.  Indeed, the real estate sector has now reached over 20% of China’s GDP.  China’s private property sector is now composed of ‘zombie’ companies just like 15-20% of companies in the major capitalist economies.  The question now is whether the Chinese authorities are going to allow these firms to go bust.  Local governments are now trying to ensure that the homes promised by the likes of Evergrande to 1.8m Chinese will be built by taking over the projects, while many property developers will be liquidated.

There is not going to be a financial crash in China.  That’s because the government controls the financial levers of power: the central bank, the big four state-owned commercial banks which are the largest banks in the world, and the so-called ‘bad banks’, which absorb bad loans, big asset managers, most of the largest companies. The government can order the big four banks to exchange defaulted loans for equity stakes and forget them. It can tell the central bank, the People’s Bank of China, to do whatever it takes. It can tell state-owned asset managers and pension funds to buy shares and bonds to prop up prices and to fund companies. It can tell the state’s asset companies to buy bad debt from commercial banks.  It can get local governments to take up the property projects to completion.  So a financial crisis is ruled out because the state controls the banking system.

The current property mess is a signal that the Chinese economy is becoming more influenced by the chaos and vagaries of the profit-based sector.  Just as in the capitalist economies of the West, the profitability of China’s capitalist sector has been falling.

And it is the private sector that has been doing badly during COVID and after. Profits in the capitalist sector have been falling.  Cumulative profits for the first eight months of 2022 earned by China’s industrial firms fell 1.4% compared with 2021, as high raw material prices and supply chain disruptions due to COVID-19 curbs continued to squeeze margins and disrupted factory activity. But profits at state-owned industrial firms rose 14%; while those in the private sector fell 9%. Only the state sector is continuing to deliver.  This is what also happened in the global financial crisis of 2008-9, which China avoided by expanding state investment to replace a ‘flailing’ capitalist sector. 

The capitalist sector has been increasing its size and influence in China, alongside the slowdown in real GDP growth, investment and employment, even under Xi.  A recent study found that China’s private sector has grown not only in absolute terms but also as a proportion of the country’s largest companies, as measured by revenue or (for listed ones) by market value, from a very low level when President Xi was confirmed as the next top leader in 2010 to a significant share today. SOEs still dominate among the largest companies by revenue, but their preeminence is eroding.  

This is intensifying the contradictions between the profitability of the capitalist sector and stable productive investment in China.  The accumulation of financial and property assets based on huge borrowing is detracting from growth potential.

State sector investment has always been more stable than private investment in China. China survived, even thrived, during the Great Recession, not because of a Keynesian-style government spending boost to the private sector as some economists, both in the West and in China argued, but because of direct state investment.  This played a crucial role in maintaining aggregate demand, preventing recessions, and reducing uncertainty for all investors.

When investment in the capitalist sector slows down as it does as profit growth slows or falls, in China the state sector can step in.  SOE investment grew particularly fast over 2008–09 and 2015–16 when the growth of non-SOE investment slowed down. As Hao Qi and David Kotz showed in a recent paper“Most of the current studies ignore the role of SOEs in stabilizing economic growth and promoting technical progress. We argue that SOEs are playing a pro-growth role in several ways. SOEs stabilize growth in economic downturns by carrying out massive investments. SOEs promote major technical innovations by investing in riskier areas of technical progress. Also, SOEs adopt a high-road approach to treating workers, which will be favorable to the transition toward a more sustainable economic model. Our empirical analysis indicates that SOEs in China have promoted long-run growth and offset the adverse effect of economic downturns.”

The debt-fuelled property bubble has also sharply increased inequalities of income and wealth in China.  And it is well known that China has a very high level of inequality of income.  Its gini index of income inequality is high by world standards although it has fallen back in recent years. 

Indeed Xi’s call for ‘common prosperity’ is a recognition that the capitalist sector fostered by the Chinese leaders (and from which they obtain much personal gain), has got so out of hand that it threatens the stability of Communist Party control.   What Xi and the Chinese leaders have called the “disorderly expansion of capital”.  

Take billionaire Jack Ma’s comment before he was ‘re-educated’ by the authorities: “‘Chinese consumption is not driven by the government but by entrepreneurship, and the market,’… In the past 20 years, the government was so strong. Now, they are getting weak. It’s our opportunity; it’s our show time, to see how the market economy, entrepreneurship, can develop real consumption.’” —The Guardian, 25 July 2019

Last year, the Chinese government set up a special zone to implement ‘common prosperity’ in Zhejiang province, which also happens to be the location of the headquarters of several prominent internet corporations – Alibaba among them.  And Xi announced plans to spread “common prosperity”, heralding a tough crackdown on wealthy elites – including China’s burgeoning group of technology billionaires

At its August 2021 meeting, the Central Finance and Economics Committee, chaired by Xi, confirmed that “Common Prosperity” was “an essential requirement of socialism” and should go together with high quality growth.  The professed aim of Common Prosperity is to “regulate excessively high incomes” in order to ensure “common prosperity for all”. 

There are two reasons why Xi and his majority in the CP leadership have launched the ‘common prosperity’ project.  The first is the experience of the COVID pandemic. As in the major capitalist economies, the pandemic exposed huge inequalities to the general public in China, not just in income but also in rising wealth for the billionaires, who have reaped huge profits during COVID while the majority of Chinese, especially middle-income groups have suffered lockdowns, loss of income and rising living costs.  The share of personal wealth for China’s billionaires doubled from 7% in 2019 to 15% of GDP in 2021.

If this were allowed to continue, it would begin to open up schisms in the CP and the party’s support among the population.  Xi wants to avoid another Tiananmen Square protest in 1989 after a huge rise in inequality and inflation under Deng’s ‘social market’ reforms. The government had to act to curb the unbridled expansion of unproductive and speculative investment. 

Xi’s crackdown on the billionaires and his call for reduced inequality is yet another zig in the zig-zag policy direction of the Chinese bureaucratic elite: from the early decades of Mao to Deng’s ‘market’ reforms in the 1980s; to the privatisation of some state companies in the 1990s; to the return to firmer state control of the ‘commanding heights’ of the economy after the global slump in 2009; then the loosening of speculative credit after that; and now a new crackdown on the capitalist sector to achieve ‘common prosperity”.

These zig zags are wasteful and inefficient. They happen because China’s leadership is not accountable to its working people; there are no organs of worker democracy. There is no democratic planning. Only the 100 million CP members have a say in China’s economic future, and that is really only among the top.  Far from the answer to China’s mini-crisis requiring more ‘liberalising’ reforms towards capitalism, China needs to reverse the expansion of the private sector and introduce more effective plans for state investment, but this time with the democratic participation of the Chinese people in the process.  Otherwise, the aims of the leadership for ‘common prosperity’ will be just talk.

In the third and final post on China, I shall deal with the external pressures on China – in particular, the intensifying drive by US imperialism and its allies to contain and isolate China and reduce its perceived threat to US hegemony.

13 thoughts on “China: Xi’s third term – part two: property, debt and common prosperity

  1. From GT today:

    “Major Chinese lenders extend more credit lines to support manufacturing sector, economic recovery

    The country’s top five lenders – ICBC, Bank of China (BOC), China Construction Bank (CCB), Bank of Communications (BOCOM) and Agricultural Bank of China (ABC) – all issued statements on Sunday, vowing to further support fast recovery of the real economy with strengthened measures. The Postal Savings Bank of China, the sixth state-owned bank, issued a similar statement.”

    I think they are on the right track., being state-owned banks.

  2. Reblogged this on DAMIJAN blog and commented:
    “China needs to reverse the expansion of the private sector and introduce more effective plans for state investment, but this time with the democratic participation of the Chinese people in the process.”

  3. SOEs may be more profitable than POEs, but it seems to me problematic to take this as a sign of their greater efficiency. SOEs enjoy access to cheaper credit and often operate in oligopolic/oligopsonic markets, giving them considerable price-setting power.

  4. I don’t think those “zig-zags” are mere wastefulness generated by a recalcitrant elite; I think they are the synthesis of the contradictions China is facing in this historical moment. 100 million is almost 10% of the population, it is a lot of people – even if you’re not a member of the CPC, chances are you have a family member who is; I don’t think this is a sign China is not democratic.

    The Soviet system is demonstrably inept in promoting growth in the personal consumption sector (light industry, durable goods). The Chinese learned from that mistake, and correctly promotes the private sector to fill that role. That is the true contradiction the CPC is facing nowadays, not some alleged Party elite sclerosis. We see that contradiction gain form nowadays in the semiconductors’ war being waged right now between China and the USA.

    The problem with the “workers’ [direct] democracy” is the fact that it is anti-dialectical. It suddenly eliminates all the contradictions. This is very reminiscent of the Trotskyist argument for the revival of the soviets as the magical bullet that would have saved the USSR (and will save the surviving socialist countries, such as Cuba and North Korea). The stereotype and accusation of the “Stalinist” party cadre that is extremely corrupt is a common theme in present-day Trotskyiste rhetoric and writings (Fidel Castro is, to this day, accused as being a mere corrupt party elite member who destroyed Cuba by the Trotskyites – the problem with this line is that, in order to sustain that argument, they swallow a lot of CIA propaganda that we know are false, such as the fable of the USD 10 billion Castro had hidden in Switzerland).

    Interestingly, the Global Times published an opinion on the Zero Covid yesterday:

    “Lost in flip-flop COVID-19 policy, West has the nerve to point finger at China”

    In this article, we see a completely different take on Zero Covid: it is the West that doesn’t know what it is doing to contain the pandemic. China sees what’s being done in the West as simply collective insanity.

    Also, taking Xi Jinping’s speech wholly, it is clear, given the context, that he doesn’t deny China is facing and is going to face a lot of problems and challenges. It is not as if the CPC claims to have found a magic formula, a “one size fits all”.

  5. Robert, quite the opposite. The rate of return has been higher in the private sector than in the SOE sector because the denominator comprising assets are different. Total assets in China include financial assets and as SOE’s have large crossholdings aka Japan in the 1980s, there denominators tend to be bigger dragging down their rate of return. Many critics of the state sector in China have used this to argue for abolishing the SOE’s without admitting they are comparing apples with pears when comparing comparative rates of return.
    Michael talking of rates of return, my analysis shows that the Chinese Complex Rate of Return peaked around 2012 or within 24 months of all other rates peaking around the world as well. This is important because it alone explains why Chinese investment rates subsided around this time. Your rate peaks around 2008 which is incongruous given the investment wave from 2009. What sources are you using?

    I hope you will deal with the Military-Civil Fusion (MCF; 军民融合) in Part 3 which has captivated the Pentagon and which is at the centre of China’s economic development model at this time. What a f…g waste of the labour of the international working class. Here is the link to the Pentagon report to Congress.

    The final point is why did the CCP unleash private enterprise in the housing market, healthcare and the rest of the manufacturing/tertiary industry in the first place? This is the primary question. The fact that it scrambles to contain the inevitable fall out is the lesser question. The CCP keeps on repeatedly unleashing then containing market forces, which makes it an interventionist capitalist economy out of necessity, because the state formed around the CCP is less consensual than parliamentary democracies thus more brittle, notwithstanding the probability that rule by consent in the West is on its last legs in any case.

  6. “a state-led, planning economic model that is China’s …. China needs to reverse the expansion of the private sector and introduce more effective plans for state investment, but this time with the democratic participation of the Chinese people in the process.”

    There has been no plan for decades, no overall allocation of state investment, let alone all investment. State monopolies contend and collude for profit. Their executives and the high state officials are scramble for the profit. And the central state firms are share corporations, of which five to fifteen percent have been sold to investors. Obviously, everyone understands this is capitalism.

  7. As stated before, Michael’s assessment of China’s ability to maintain growth and refinance debt more or less cinches the MMT arguments, as in China is realizing the MMT dream that finance and refinance can be detached from profitability, overproduction, and declining rates and masses of surplus value. It’s an odd position for a Marxist economist, but politics is nothing if not odd.

    The issues before this congress of the CPC are the issues, and the cycles, that have haunted the CPC for decades since the revolution: how to retain power when the class forces unleashed by the failures and successes of development threaten the party”s dominance.

    “Economics” is always a veil covering class struggle. “Democracy” has exactly zero to do with it. Xi wants to suppress the “non-state” capitalist forces. That doesn’t make him “socialist” or “less capitalist” than those individuals he’s suppressing.

    China did not escape the repercussions of the 2008-2009 contraction. It will not escape the impacts of the next one.

    The questions that must be answered is: Which class has been strengthened in China over the last 40 years? What class relations have been strengthened, capitalist or proletarian? What class relations will continue to expand regardless of hesitations and backtracking by the CPC?

    1. Anti-capital, mmt assumes the production of cheap, material goods in the global south, which literally give substance to mmt dollars, which are intended for distribution among the the working classes. Actually quantitative easing is a kind of mmt distributed among the capitalists. Forms of virtual currencies are supported by fundamentally, violent, imperialist super-exploitative activities aimed at countries like China , which actually produces material goods, especially wage goods, for the US and for itself.

  8. A lot o comments here that reflect more the state of the West than of China. It’s like they’re projecting their problems, dilemmas and expectations on China.

    The evidence is clear: the Chinese do consider their system socialist, and Market Socialism with Chinese Characteristics a form of very primitive, early stage socialism. Their policies, capacity of administration of the whole nation, and results do corroborate to their claim (i.e. it is not just a randomly invented term).

    If you disagree with the CPC’s theory, fine. But you have to respect it. Simply ignoring it exists and/or fabricating facts is not gonna help your cases. Most of the time, humility is good; there’s no shame in admitting Chinese Marxism was proven right and Western Marxism was proven wrong, and to start learning from the Chinese.

    1. There is no such entity as Chinese or Western marxism. marx and Engels put socialism on a scientific basis. Consequently, it has to be studied and to generate new theories and concepts. Would you claim that there is a Chinese or Western science: a Chinese biology? a Western chemistry?

      1. There is actually a Chinese biology: The ecology of bamboo forests and pandas would be a simple example. And when the discoveries in modern chemistry were first made they were largely made in the “West” so until the instruments and techniques were adopted elsewhere, in that geographical sense the chemistry was indeed “Western.” It may be incorrectly objected that this is a trivial point, that this kind of Chinese biology or “Western” chemistry are strictly geographical, merely spatial differences in what is being studied.

        But that is exactly what is different about Western Marxism: Western Marxism is basically opposed to the Russian and Chinese Revolutions, denying the relevance of their experience to the programs and ideals upheld by the various stars in that constellation.

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