China’s Faustian Deal and its Obvious Loophole

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The Chinese 30 year economic “miracle” of rapid growth is quickly coming to an end, spelling hard times ahead not just for Bourgeoisie investors and speculators, but workers across the world, especially in China itself.

Flagging global demand for manufacturing, most notably in Europe and North America, has created commodity gluts in Chinese firms. In other words, they’ve made far more than they can actually sell. This has created several problems for the Chinese economy, the most immediate of which is an upcoming debt crisis involving private banks, private investors, manufacturing companies, state owned companies, and local governments. Since manufacturing and state owned companies relied on credit from the other entities mentioned earlier to operate, often over indulging since they believed the central government would guarantee their payments to avoid major defaults. But now that many firms are no longer making positive profits, and there is such an anemic state of affairs in Europe and North America , it doesn’t look like that’s going to change any time soon. This makes any major attempt by the central government to bail out these companies nothing but a money pit.

In response, the Chinese government has been trying to boost the liquidity of banks through cash supplements to ensure that any eventual crisis doesn’t lead to a run on the banks and/or massive bailouts, which would probably lead to a 2008 style downturn. Even if this crisis can be avoided or greatly mitigated, and there are reasons to doubt the government is up to the task, a less dramatic period of stagnation with low inflation and low growth may be in the cards, similar to the situation in Japan.

As well renowned economist, Richard D. Wolff, has pointed out there is only one feasible option for the Chinese. They must convert their export and manufacturing based economy into a post-industrial service based one, much like western countries have, most successfully in the United States. And they must do it quickly. Layoffs and defaults in major manufacturing firms across China have already begun in a steady stream. Billions of Yuan have already been set aside to resettle the workers in other industries, but it may not be enough.

The question of whether China can effectively become a post-industrial economy is a very tricky one, and the definitive answer may rest with President Xi Jinping and the Central Committee. As it stands, I believe they will fail resoundingly.

China began its decades of prosperity with a Faustian, if necessary, deal with global capitalism. Starting with Deng Xiaoping, China’s strategy for growth was providing the world with its cheapest and most reliable labor in exchange for western investment. Coinciding with trade liberalization across the globe, China was able to move manufacturing from developed western countries and even developing countries such as Mexico to its own soil. The problem with this is, of course, that it requires wages to remain very low. While this strategy did succeed in bringing billions out of poverty thanks to the jobs it brought, it may ultimately prevent China from turning into a post-industrial economy.

There is a chance that enough wealth was given to workers to create the internal demand needed, but some indicators say otherwise. While consumer spending is rising, so is household debt. In fact, policymakers are actively encouraging banks to loan out more and more to consumers to boost the economy. Chinese Millennials, also known as the Moonlight Generation in reference to their low bank accounts at the end of the month, have gained a reputation of overspending and taking on big debt to do so. Government officials as well as banks are hoping their policies of easy credit to consumers as well as the behavior of these young people will lead to a new era of debt-driven growth similar to that of the United States’ in the 1900’s.

However, there is one key distinction to the impressive growth of the United States in the 20th century and China’s current situation. Up until the mid 1970’s, the United States had a general labor shortage. Indeed, we were originally a large continent with relatively few people in the labor force. This changed when women permanently entered the workforce, baby boomers came of age, and mass immigration continued. The addition of the computer to corporate work also served to boost worker productivity massively without an increase in pay.

But for those first 75 odd years, firms in the United States had to consistently boost wages with rising profits. China has not, and indeed, could not have such an experience given its massive population and economic strategy centered around low labor costs.  They have seen an explosion of wealth inequality similar to that of the US’s after the 70’s, to the point where it now has more wealth inequality than the US.

This fact provides both the problem and the solution to China’s transitional problem, should they be willing to go through with it. As Karl Marx pointed out all those years ago, Capitalism has within itself many contradictions, but it is very good at producing large amounts of commodities and value. Chinese capitalism is no different. The money needed to turn their economy into a post-industrial one exists, if they have the balls to take it from the private owners and bureaucrats who have accumulated it.

Were the Chinese government to redistribute this wealth and then convert its capitalist and state owned enterprises into cooperatives owned by workers, the transition would become much easier. For workers, who spend much more of their income on consumer goods than capitalists, would finally have all the private wealth in the country and be able to keep it that way.

But alas, I sense that capitalist and banking interests may be too entrenched in the current establishment for this to happen. After all, why else would banks be cutting their buffer of liquidity for bad loans, the government giving out broad tax breaks for big businesses at the expense of buyers, and encouraging loans to consumers at little to no immediate sacrifice to the rich and powerful despite their long term risk?

China’s “Communist” party, however, is deathly afraid of social unrest, and rightly so: its legitimacy is founded on economic success. And unlike western liberal democracies, where dissatisfaction can be vented by simply voting in a different, but similar in effect, party, the Chinese can only blame one party, making any unrest possibly fatal for the government. If the economy slows to such an extent that the jobs created in service cannot significantly offset the ones lost in manufacturing, and/or a debt crisis triggers a recession, they may be in for big trouble.

Perhaps if there is enough unrest, organizing and disruption by workers, the pressure on the government to do something would be insurmountable, but I have little faith much more would be accomplished besides increases in welfare, more government jobs, and a higher minimum wage.

Ironically enough, it may have been impossible for China to have achieved socialism  in 1950 thanks to its poverty and level of development, but now that it is not only possible, but advantageous, they could hardly be bothered.

About the Author

Victor Villanueva
Editor and writer for Bunker Magazine.

2 Comments on "China’s Faustian Deal and its Obvious Loophole"

  1. Raise super hot productive forces they said, poverty isn’t socialism they said.

  2. Hmm Its a serios theme and now we must understand that the 3-rd Poweer is the most powerful and waiting His time …

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