Capitalist Crisis In China –                 Economic & Political Implications

Capitalist Crisis In China – Economic & Political Implications

October 26, 2021 0 By Yatharth

Mukesh Aseem

In the previous issue of The Truth, we had covered in brief the crisis unfolding in China triggered by the debt default by Evergrande Group, 2nd largest real estate developer in China, with combined debt of USD 305 billion, equivalent to 2% of China’s gross domestic product (GDP). Once China’s best-selling developer, the debt-ridden company’s survival has been made difficult by the Chinese central bank’s slight tightening of credit rules. Like all major financial crises, Evergrande Group’s financial woes have not been magnified in a single day, but due to years of heavy and aggressive borrowing. This steady increase in debt once served the company well, helping it greatly expand its business empire. Over the years it emerged as one of the top real estate developers in China with over 1,300 projects spread across 280 cities. It enjoyed rapid growth during the mid-2000s and the post-2009 global financial crisis, riding a wave of rising asset prices. But now property sales in China have slowed significantly – a major setback for a company that accounted for 4% of China’s total real estate sales.

Evergrande suffered a final setback when Peoples bank of China (PBOC), the Chinese Central Bank, restricted lending to real estate developers by putting an upper limit on borrowings. The regulators also initiated scrutiny of accounts and transactions of financial institutions and shadow lenders (lenders outside banking sector regulations) refinancing short-term loans of real estate developers. This crippled real estate developers such as Evergrande. The company faces a swarm of nearly 800 unfinished residential projects as well as suppliers awaiting payment of their bills, large numbers of big and small investors who invested in the company’s bond and deposit schemes, and millions of home buyers awaiting delivery. Evergrande has intensified its efforts to sell off its assets at very low margins to eventually reduce its debt and raise cash. However, its efforts have so far been insufficient. Property purchases have fallen sharply due to the impact of the crisis, and retail investors in its money management products have already organized protests in several cities. Meanwhile, suppliers and contractors are grappling with potential losses, and since many of them are also paid in the form of real estate, they need to sell these assets as quickly as possible to meet their cash needs. This is further disrupting the real estate market. In addition, Evergrande’s 200,000 employees, other property developers and thousands of employees engaged in the affected upstream and downstream businesses are beginning to feel uneasy. Therefore, there is a risk of this financial crisis spreading to the entire economy.

Many analysts believe that the Chinese authorities will not allow the situation to turn into a cascading crisis and will help Evergrande get at least some capital. This may force the group to sell some of its stake to a third party, such as a state-owned enterprise. The Chinese authorities are not expected to allow the crisis to spread uncontrollably since it will cause serious damage to China’s financial system because at the end of the year 2020, about 41% of the credit of the Chinese banking system was directly or indirectly linked to the real estate sector. Therefore, most analysts do not believe that the Evergrande crisis will become a Lehman Brothers-like event. But this confidence appears to be misplaced in view of the developments in the collapse of another conglomerate HNA on which 64,000 creditors have made claims of more than 221 Billion USD and the restructuring is facing much protest as the regulators try to force haircuts on small businesses and households.

But the most important thing to understand is that Evergrande’s downfall is due to some deliberate decisions by the Chinese government and financial institutions. These decisions were first highlighted by the cancellation of the Ant IPO. Subsequent decisions affecting companies like Meituan, Tencent, taxi company Didi and many others impacting private school/tuition/coaching and ed-tech industries, cryptocurrencies, video gamers, data localisation/privacy, etc. Chinese regulators have taken several decisions to rein in them, which has led to business challenges for all these companies and their market value has fallen. In a way, rather than a sudden outburst of the crisis, it appears to be an attempt at ‘controlled demolition’ by the regulatory apparatus trying to prevent the same explosion as the 2008 collapse of Lehman Brothers created in the US economy. Whether they will succeed or not, is a different matter. However, stunned by the speed with which the property sales and prices have faced distress regulators appear to have developed cold feet and there have been statements by authorities that house prices will not be allowed to crash and first time home buyers (having already put up substantial part of the purchase price in advance) will be protected.

Real Estate & Exports – Engines of Growth in China

Over the past 2 decades the Chinese economy has grown at extremely rapid pace. One of the pillars of that growth was vast real estate and construction activity driven by its financial system as well as the large amount of capital liquidity provided by foreign capital investment. This capital was used to build huge infrastructure, first, a vast transport grid – highways, high-speed railways, waterways, airports, etc. – to link industrial coastal areas with the vast hinterland; and second, rapid and forced pace urbanization creating many large cities such as Wuhan. A large amount of real estate, both commercial and residential, has been built using credit and sold through loans so that real estate now accounts for 29% of Chinese GDP.

Second pillar of spectacular growth in economy was the exports competing in international markets on lower prices through repressed wages and low domestic consumption as a component of total GDP. High level of exports was achieved through extracting high surplus value from workers and sharing it with foreign buyers through low prices of export goods. Wages were kept low by restricting labour mobility through the internal passport system called ‘houkou’ which regulated supply of labour as required by industry preventing workers from moving to other places freely per demand. Moreover, SEZs had no unions and labour laws. Low wages and long working hours (remember ‘996’ – practice of working from 9 AM to 9 PM 6 days a week adopted by many high growth companies.)

Low wages, Low Consumption, High Property Prices

Combination of low wages with deliberately kept low return on financial savings, to keep capital cheap, along with high property prices kept domestic savings rate very high and consumption low. House property was both high priced as well as only viable avenue of savings for households. Return on financial savings being low forced households to save a very high level of their income to buy houses which became the main form of their wealth, roughly 80% compared to 30% in US.

Some decisions of the 1990s are at the root of the rapid development of real estate and building construction through unlimited debt. Much of the industrial development was through Special Economic Zones with no taxes. Hence many firms enjoy a tax-free regime. There are also no wealth and property taxes or estate duties. Moreover, tax revenue is not shared with the local governments. Public finance reorganization in 1995 limited the borrowing capacity of local governments too. However, Land Management Act, 1998, allowed sale of land to private parties. Local governments found that they could finance themselves either by selling the land or by raising off-balance sheet debt through SPVs (Special Purpose Vehicles) using land as collateral. Real estate developers hoarded huge tracts of land building houses and selling to those who lacked other profitable avenues of investment. Thus, the vested interests of real estate developers and the interests of local governments became aligned to drive up real estate prices. The buying public too had houses as their main source of savings and wealth and, obviously, wanted the value of their savings to increase. Therefore, no one was interested in drop in prices, except those who do not already own real estate. And all of them are now up on their feet in protest against proposal to introduce property taxes by Xi Jinping in August since apart from additional expenditure, it will also depress prices.

High Savings, High Debt, Long Working Hours – ‘Lying Flat’

As a result, the home prices in China skyrocketed. According to China’s National Bureau of Statistics, between 2002 and 2017, home prices in the four major cities increased by 6-7 times, while in other cities they increased by 4-5 times. Households have become increasingly indebted owing to housing prices and are unable to support increase in other consumption. According to report of a survey conducted by the South China Morning Post on the microblogging site Weibo, 53% of 284,000 participants said they do not want any child while 30% wanted only single child. Most attributed this to the high cost of housing and education leading to inability to afford children. The report calls ‘high debt to income ratio’ of the households as the best contraceptive. The compulsion to be tied to jobs with long working hours to pay off such high debt is creating huge alienation and discontent among youth. Growing tendencies like ‘lying flat’ and ‘involution’ also indicate this (according to adherents of ‘lying flat’, nothing is going to be achieved in life even by working day and night, so it is better to leave everything and ‘lying flat’.)

Comparison with US will help understand the importance of real estate in Chinese economy. In 2002, real estate investment in China was one-eighth of the US and remained less than US till 2008 financial crisis. In 2009 China overtook US. In 2018 the Chinese real estate and construction sector was at least twice the size of the US counterpart and as a percentage of GDP it was three times more than US. It’s so important in the Chinese economy that 17% of employment in cities is in this sector alone. Its share in the local public revenue is about 1/3. Household property prices account for 80% of the total wealth of Chinese households, compared to only about 30% in the United States.

With limited domestic consumption demand, in addition to exports, debt-based real estate and building construction was the only engine that could accelerate growth of the economy. In 2010, domestic consumption in China was only 34% of GDP, which was only half the US level. In 2020, it had increased to 39%. Therefore, the Chinese government, following the path of capitalist development, had no way of avoiding this focus on a single sector to achieve high growth rates justifying their capitalist path and creating illusion of increased consumption in future.

As real estate prices skyrocketed, it became one of the most expensive one in the world. Now selling is getting harder due to massive expansion, debt-ridden developers are in trouble as they find themselves unable to complete projects with cash flows drying up. Building supplies are so high that 15 tall tower blocks in Yunnan’s capital Kunming had to be demolished last month after eight years of remaining unfinished. In Chinese cities about 20% of the built buildings are vacant which can accommodate about 90 million people. Hence, new sales as well as construction has suffered, new launches are now down. But that is creating further problems in debt servicing as well as a spate of layoffs for workers.

Chinese ruling class attempted to resolve this through exporting the real estate cum construction through Belt & Road Initiative (BRI). However, this not being 19th century with vast virgin territories (from capitalist perspective) to colonise, as the whole world is now already in the fold of capitalist production relations and bourgeois national states, they have a somewhat limited opportunity there too.  It is not enough to postpone their own crisis for the length of time that it could for old European imperialist powers.

Anyway, this path of rapid economic growth is not infinitely endless. Now the population of China is hardly increasing. In 2020, only 12 million babies were born, down from 14.6 million a year ago, but is quite low in a country of 1.4 billion. This trend may become more pronounced in the next decade as the number of women of childbearing age between 22 and 35 is expected to decline by more than 30%. Some experts are predicting that the birth rate could drop to less than 10 million a year, causing China’s population to start dropping and the demand for property to go down. The phenomenon of “shrinking cities” has already arisen. After nearly three decades, during which tens of millions of people left their villages to settle in cities, the largest migration in human history has now slowed down drastically.

New Development Stage‘ – Reversal of Policy

The campaign to rein in this giant machine began in October 2017, when Xi delivered his speech at the 19th Party Congress with the famous line: “Houses are meant for living, not for speculation”. In November 2018, PBOC red-flagged huge debt of private property developers raising the interest rate at which Evergrande had borrowed close to 13%. Hence no doubt about its status as a high-risk business. In August 2020, Chinese regulators announced their ‘three red lines’ policies and imposed tough financing limits on real estate companies. Evergrande exceeded all the three red lines and has been juggling finances ever since, which eventually led to a cash crunch within a year.

To understand the new policy, let us quote from an important speech of Xi Jinping on 11 January 2021 published on 8 July 2021 in Qiushi, in which he discussed problems of China’s ‘development’, its current situation and challenges, and future direction in the context of the ‘new development stage’. This speech was given at a special seminar for ministerial and provincial-level leadership for the implementation of 14th Five Year Plan (2021-2025) and in the context of a ‘new philosophy of development’ for the next 15 years till 2035. Xi began with proclaiming the achievements, “China is now the world’s second largest economy, the largest industrial nation, the largest trader of goods, and the largest holder of foreign exchange reserves. China’s GDP has exceeded RMB100 trillion yuan and stands at over US$10,000 in per capita terms. Permanent urban residents account for over 60% of the population, and the middle-income group has grown to over 400 million.”

He goes on to talk about the ‘new philosophy of development’ to make China ‘a modern socialist country in all aspects’, “we have changed the thinking that the GDP growth rate is the sole barometer of success. … we cannot blindly pursue rapid growth without regard for objective laws and conditions. … local governments should not take national regulatory targets as the baseline for local economic development, nor should they compete with each other to have higher growth rates. … we needed to shift the focus to improving the quality and returns of economic growth, to promoting sustained and healthy economic development, and to pursuing genuine rather than inflated GDP growth…” Further, “our economy was now in a slowing growth phase, a painful structural adjustment phase, and a phase of absorbing the adverse effects of previous stimulus policies.”  And “we have initiated supply-side structural reform. … the five priorities in promoting supply-side structural reform were cutting overcapacity, reducing excess inventory, deleveraging, reducing costs, and strengthening areas of weakness.”

Further, “We cannot allow the gap between the rich and the poor to continue growing—for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf.” And “We should prevent major fluctuations in the macro economy and avoid large inflows and withdrawals of foreign investment in the capital market. … We need to prevent the disorderly expansion and unchecked growth of capital… We should guard against the risk of large-scale job losses, strengthen public health security, and effectively prevent and handle public disturbances.”

Xi further said, “that the essence of the new development dynamic is realizing a high level of self-reliance. Currently, the environment for our economic development is changing, particularly with respect to our comparative advantages in production factors. Because labor costs are rising and the carrying capacities of our resources and environment have reached a limit, the production function formula of the past is no longer sustainable, and science and technology are becoming more and more important on all fronts. Under such circumstances, it is important to put more emphasis on independent innovation.” Also, “Expanding domestic demand is not a temporary policy to cope with financial risks and external shocks, nor is it about unleashing a deluge of strong stimulus policies or increasing government investment. Rather, it is about establishing an effective system to boost domestic demand based on China’s actual economic development, moving to tap the potential of demand, working faster to build a complete demand system, strengthening demand-side management, and expanding consumer spending while also upgrading the level of consumption

And last but not the least, “We must act as soon as possible to resolve problems that could lead to public disturbances such as overdue payments for construction projects and wage arrears owed to rural migrant workers.”

Capitalist Problems of ‘Socialism with Chinese Characteristics’

What one immediately notes is that although Xi is talking of the next stage of socialist economic development, the problems and priorities he is talking about are the same as of capitalist countries’ bourgeois leaders – overproduction and lack of expansion in demand, problems of irrational incentives, financial risks arising from sudden uncontrolled in & out flows of domestic and foreign capital, excessive amount of debt, fictional growth in GDP, slowing rate of growth, troublesome adjustment, unemployment, growing inequality between rich and poor, uneven development, overdue payments to small businesses, rising cost of labour, arrears of wages, problem of migrant workers, danger of public disturbances, so on and so forth! Wonder? Well, no reason to! The camp of ‘socialism with Chinese characteristics’ has been much insistent in its ‘arguments’ of Chinese exceptionalism, that the economic laws of capitalist crisis do not apply to China even if the capitalist market economic policies are implemented. However, the problem is that all the objective laws operate independently of our will, otherwise they would not be objective laws. The laws of political economy, the laws of capitalist relations of production, are also objective laws that work independently of our will and just like every scientific law certain outcomes can be predicted based on these laws and tested through observations.

Although we will not go into a detailed data analysis of the Chinese economy, some risks mentioned in Xi’s speech can be corroborated based on facts made available by Chinese economic institutions. Xi pointed to the risk of unemployment. This is not an imaginary risk but a reality. According to the Draft Outline Document of the 14th Five-Year Plan (2021-2025) released in October 2020, China’s unemployment rate in 2020 was 5.2%. The plan does not even pretend to reduce it. The target is not to allow it to exceed 5.5% in 2025. Xi also referred to the painful adjustment required by the slow growth rate. This too is already a reality. According to statistics from the Supreme People’s Court of China, as of 2014, less than 2,000 bankruptcy cases were filed in the courts annually. This number started rising rapidly from 2015, and in 2018 there were more than 18,000 such cases. Since the peak of 2013, the profitability of not only state but also private corporates has declined sharply and the rate of return on net assets has halved from around 14.5% to around 7% in 2020.

China has been able to deal with earlier crises like 2008 global financial crisis through huge cash incentives. But it has made China one of the most indebted economies in the world. In 2002, China’s aggregate debt was about 120% of its GDP, in 2019 it increased to about 245% of GDP, while the GDP itself increased manifold. This debt-driven growth has produced many billionaires, China now being second only to the US. This is being referred to as the Chinese Gilded Age, like the US one at the turn of the 20th century, and similarly many Robber Barons with filthy wealth have emerged through politically directed capital accumulation.

But the growing inequality between Robber Barons on the one hand and low-wage workers working long hours on the other is creating grievances and resentments leading to political problems confronting the ruling ‘Communist’ party. The party, led by Xi Jinping, has tried to address this by taking some welfare and poverty reduction measures on the one hand, and on the other, tried to cut to size some of these Robber Barons such as tech giant Alibaba’s Jack and Pony Ma, Xu Jia Ying of Evergrande and others through regulatory actions. This is again along the  lines that the US tried to crack down on American Robber Barons by repeatedly attempting to break monopolies and trusts, for example, Rockefeller’s Standard Oil, AT&T, etc. and the passing of the Glass-Steagall Act of 1933, which forced banks such as JP Morgan to split their commercial and investment banking businesses. But this regulatory action is creating problems of its own kind, Evergrande being an example. Since, the overwhelming proportion of wealth of Chinese households is in house property, any fall in prices will induce them to save more by reducing consumption contrary to the avowed policy of expanding aggregate demand and hiking domestic consumption in the economy.

Some left-wing analysts believe that Xi’s attempt to rein in the billionaires is aimed at moving China’s economy back from the unbound expansion of private capital to state control and ‘socialism’. In their view, Xi is more hardcore Marxist and is, therefore, increasing state and Communist Party control over the industry. But this is not correct on facts. Initially, Xi was keen to carry forward the policies of market reforms implemented in China starting from Deng Xiaoping. In his speech referred to above Xi himself said, “we have enabled the market to play the decisive role in resource allocation and given better play to the role of the government. I stated at the Third Plenary Session of the 18th CPC Central Committee in November 2013 that the market is the most efficient means of allocating resources. A general law of market economies is that the market should determine the allocation of resources. I thus highlighted the need to let the market play the decisive role in resource allocation, thereby redefining the role of the market.” He promoted market-friendly regulations that favoured greater investment in the stock market and eased government control over China’s currency. His administration also considered a proposal to have professional managers instead of party leaders in the running of state companies. But one after the other those reform plans gave rise to chaos. In the summer of 2015, a huge sell-off in the stock market shook the markets. The central bank’s steps to deregulate the Chinese yuan also made the public more restless, reminiscent of the problems of extreme inflation in the 1980s and 1990s. Only then did Xi reverse his policies and is now talking of ‘Dual Circulation’ and ‘Common Prosperity’.

‘Dual Circulation’ Model

In May 2020, the Chinese government announced the dual circulation development model that has since guided many of the policies that have been announced. According to the dual circulation model, China plans to emphasize both growing exports (international circulation) and expanded domestic demand, powered mainly by rising consumption (internal circulation), with the two reinforcing each other. The idea is that expanding demand for Chinese-manufactured products and exports as well as domestic consumption would support and strengthen China’s manufacturing base which is the engine of China’s development success.

But there is contradiction at the heart of the dual circulation formulation. China’s export competitiveness—like that of Germany, Japan, and other persistent surplus-running countries—depends on ensuring low wages. It is no mere coincidence that in all the countries with high persistent surpluses workers are paid less relative to their productivity levels than the workers of their trade partners. But China’s low domestic consumption rates are mainly the consequence of Chinese households retaining one of the lowest shares of GDP. This means that conditions that strengthen consumption result in less competitive exports, and vice versa.

‘Common Prosperity’. How Common?

Xi Jinping’s essay ‘To Firmly Drive Common Prosperity’ published in Qiushi on 15th October is based on Xi’s speech at the 10th meeting of the Central Financial and Economic Affairs Commission on August 17. (Official English version hasn’t yet been published. I have used an English translation available online.) He says that ‘we allowed some people and regions to get rich first’ and warns about the dangers of income inequality, political polarization, the tearing of the social fabric, the collapse of the middle class, and the rise of ‘social disintegration, political polarisation, and rampant populism’ in ‘some countries’. Xi insists China won’t go that way and says “obvious and substantial progress” will have been made by 2035 toward the equalization of basic public services, and basic realization of “common prosperity” for all the people by mid-century. He says “involution” and “lying flat” – both part of the urban middle-class youth’s critique of the hypercompetitive culture of overwork – will be “avoided” and ‘Common prosperity’ is ‘the prosperity of all people in their material and spiritual [and moral] lives.’

But, of course, there is a ‘but’! ‘Common prosperity’ is not ‘neat and tidy egalitarianism’. ‘We must plan, and navigate between needs and possibilities. We must base the protection and improvement of the livelihood of the people on economic development and financial sustainability rather than unrealistic pursuits and expectations and promises that cannot be fulfilled. The government cannot take care of everything. Its focus should be on strengthening the construction of people’s livelihood guarantees that are fundamental and universal. Even if we reach a higher level of development and acquire stronger financial resources in the future, we should not set aims that are excessively high, and/or provide excessive guarantees. We must resolutely prevent [ourselves] from falling into the trap of nurturing lazy people through “welfarism.”’ 

Then what should be done? ‘High-quality development requires high-quality workers. Only by … upgrading human capital can we increase total factor productivity and reinforce the basic propulsion force behind high-quality development. So, ‘Encourage industriousness’ because ‘A happy life is earned through struggle, and common prosperity requires industriousness and wisdom.’ He wants to ‘enhance the human capital of the entire society and professional skills, improve the people’s ability to find employment and start businesses, and strengthen their capability to get rich. We must prevent social stratification, open up channels for upward mobility, create opportunities for more people to become rich, form a development environment with participation from everyone, and avoid [the phenomena of] “involution” and “lying flat”.’ Yes, workers should work harder to increase productivity. That will make them happy!

There is big focus on expanding ‘the size of the middle-income groups as a proportion of the population’, ‘creating an olive-shaped [income] distribution structure with a large middle and [two] small ends.’ But who will join this large middle-income group? One, ‘Graduates from higher education institutions.’ Two, ‘skilled workers’ – by increased ‘efforts to improve the training of skilled talent, raise the salary of skilled workers, and attract more highly qualified talent to join the ranks of skilled workers.’ Three, ‘Owners of small and medium-sized enterprises and sole proprietors’ ‘who have become rich through entrepreneurship. We must improve the business environment [for them], reduce their burden of taxes and fees, and provide them with more market-based financial services.’ Four, Migrant workers – proposes policies to alleviate their concerns by relaxing ‘houkou’ controls on them and allowing their families to also move with them. Five, civil servants – salaries ‘shall be appropriately increased’. Sixth, ‘We must increase the income of urban and rural residents from housing [property], rural land, financial assets and other types of property’. ‘We should comprehensively promote rural revitalization, accelerate agricultural industrialization, revitalize rural assets, increase farmers’ property income, and make more rural residents work hard to become rich.’

Ah, where have we heard all this earlier? Youth should not ask for jobs; they should rather give jobs. Government will provide skill development and loans. Youth can get rich through merit, skill, hard work and entrepreneurship. Be self-employed, you can at least do some hard work in ‘pakoda talna’!

But, of course another ‘but’, what about those unskilled, less talented and ‘lazy’ workers who miss the boat for all the promised riches? For them, ‘build a foundational system for coordinating and supporting primary distribution, [secondary] redistribution, and tertiary [re]distribution; increase the level of adjustment and precision in taxation, social security, transfer payments, etc.’ ‘While we should allow some people to get rich first, it should be emphasised that those who become rich first [shall] lead and assist those who are not yet rich. We shall focus on encouraging industriousness, legal business operations, and those leaders of wealth acquisition who dare to pioneer.’ Ah, charity! ‘We must strengthen the regulation of the public welfare and charity sector, improve tax incentive policies, and encourage high-income groups and enterprises to give more back to society.’ 

Like September 2021 China Daily article describing ‘common prosperity’ as “the adjustment of overly high incomes . . . more help for low-income groups . . . and the expansion of the middle-income group”, Xi also says that the goal of the common prosperity campaign is to rebalance income levels through transfers from those who are rich to those who are not. Rather than doing so by raising wages—which would undermine export competitiveness in a country in which the export sector comprises a disproportionately large share of the economy—focus is on fiscal transfers and mainly on what it calls tertiary distribution. In Chinese economic jargon, primary distribution refers to wages and direct income as a source of disposable household income, whereas secondary distribution refers to fiscal transfers to households, and tertiary distribution consists of donations by businesses and wealthy individuals.

Rather than raise wages, in other words, the ‘excess profits’ of businesses and the wealthy are to be passed on to working-class Chinese households in the form of fiscal transfers and donations from businesses and the wealthy. In this way, they aim to keep domestic wages competitively low, while at the same time raising overall household income levels by delivering to workers and the middle classes a higher share of business profits. In principle, this approach could help strengthen domestic consumption without undermining export competitiveness. But, this ‘charity’ based balancing of incomes has never worked in reality and is only a ploy to keep people in illusion of better days ahead.

And for those meritorious, talented, skilled, efficient, hardworking rich who reach the Garden of Eden? ‘We must protect property rights and intellectual property rights, and protect legitimate wealth creation. … At the same time, we also must mobilise the initiatives of entrepreneurs and facilitate the regulated and healthy development of all types of capital.’ No, we will not full freedom to them, of course not. That will might create grievance among people. ‘We must resolutely oppose the disorderly expansion of capital, draw up a negative list for market access for sensitive areas, and strengthen anti-monopoly regulation and supervision.’ While protecting income that is legitimately acquired in accordance with the law, we must also prevent [social] polarisation and eliminate inequitable distribution [of income]. We should reasonably regulate excessive income, improve the personal income tax system and regulate the management of income from capital. We must actively and steadily push forward property tax legislation …. We must increase consumption taxation adjustments, and study [possible] expansions in the scope of consumption tax collection.’ Yes, we will show as if we are acting against the moneybags, but in its garb, we’ll try to increase regressive indirect taxation – sales tax or value added tax or GST, without calling it so. And some more rant against ‘bad’ rich! ‘We must resolutely prohibit and suppress illegal incomes, resolutely curb [underhanded] dealings between power and money, and resolutely crack down on insider dealings, stock market manipulation, financial fraud, tax evasion and other activities aimed at obtaining illegal income.’ But where have we all heard it before?

And last, but not the least, ‘we must promote common prosperity in the spiritual [and moral] lives of the people. The promotion of common prosperity is highly integrated with the promotion of all-round human development. We must strengthen the guidance of the Socialist Core Values, and education on patriotism, collectivism and socialism. We must develop [our] public culture enterprise, improve the public culture service system, and continuously meet the diverse, multi-levelled, and multi-faceted spiritual, moral and cultural needs of the people.’ Not clear? Immediately after this came many regulations to stop ‘effeminate’ portrayals in the name of entertainment, time restrictions on playing video games, schools and colleges’ emphasis on discipline and fitness, etc! It is virility and patriotism that will create ‘common prosperity’ and ‘strong China’, folks!

But, oh yet another ‘but’, remember to ‘Adhere to a gradual and orderly process. Common prosperity is a long-term goal that requires a process and cannot be achieved overnight. We must fully consider the long-term, arduous and complex nature of the enterprise. We must do it well; it can neither wait nor be rushed.’ Hence, ‘We must strengthen public opinion guidance on driving common prosperity to provide a favourable public opinion environment. In doing so, we should clarify various fuzzy understandings, and guard against impatience and fear of difficulties.’

Why? Because they need to ‘continuously consolidate the Party’s foundation for holding power over the long term’. It is not socialism, it is not working-class rule, ‘common prosperity’ is the foundation for ‘the Party’ holding power over long term. Ah, the cat is out of the bag!

Some Political Issues

The excerpts we had given from Xi Jinping’s first speech show that the leadership of the Communist Party of China knows that the basis for sustaining the rapid economic growth of the past two decades no longer exists and without this basis, rapid growth will lead to financial crisis, high level of inflation, bankruptcy of industries, layoffs and unemployment and will result in Xi’s own words, to ‘public disturbances’. The Chinese Communist Party knows that the developments of Tien An Men Square were the result of rapid inflation and decline in standard of living in 1982 and then 1987-88. Even then the party had quickly withdrawn its steps and opted for stability after the economic crisis. Now also the same thinking lies behind the change in policies. Since the 1980s, this pattern in China’s capitalist development – retreating from the brink and avoiding crisis – has been repeated several times.

On the other hand, many bourgeois analysts and economists have long called on Beijing to reform China’s market system to allow the development of ‘free capitalism’, and they have denounced the reduction of private sector participation over past few years. It has been described as a step backwards to state controlled capitalism. But this analysis is based less on economic reality and more on liberal ideology. Xi Jinping’s speech makes it clear that there is no substitute for greater government control at this time in an economy struggling with limited consumption demand and overproduction. A stronger private sector and a more market-oriented economy will do almost nothing to address the real causes of China’s slowdown in the near and medium term or its growing reliance on debt. This is because there is no real supply side problem in China. The problem is on the demand side, which has been made worse by the coronavirus pandemic. Hence the retreat of the private sector in recent years is not a cause but a consequence of China’s underlying demand-side problems. High growth rates in an economy with repressed domestic consumption can be achieved only by steadily increasing the share of demand from state-driven investment and infrastructure creation. This is the “new stage of development” in Xi’s words.

And that’s exactly why that old liberal imperialist mouthpiece ‘The Economist’, unlike many ordinary Liberals, has been loudly applauding Xi Jinping’s policy of ‘vibrant state capitalism’, “Mr Xi is not simply inflating the state at the expense of the private sector. Rather, he is presiding over what he hopes will be the creation of a more muscular form of state capitalism. It is getting harder to distinguish between the state and private sectors. It is getting harder to distinguish between corporate and national interests. And for all its inefficiencies, contradictions and authoritarianism, not to mention its increasingly pious cult of personality, it is getting harder to claim that state capitalism will hobble China’s attempts to produce companies and master technologies that put it on the world economy’s leading edge. 

It isn’t Milton Friedman, but this ruthless mix of autocracy, technology and dynamism could propel growth for years.”

And this conclusion of the Economist leads us to a basic political understanding of the seemingly contradictory phenomenon of rule of a ‘communist’ party in China and intense development of capitalism because the liberal propaganda has created the illusion that with the adoption of capitalist economic policies liberal political reforms are also inevitable, which will eventually compel a previously socialist country to adopt the form of bourgeois democracy. But Deng Xiaoping, who initiated capitalist economic reforms in China, had a different view. The lessons learned from such experiments in Eastern Europe, especially Yugoslavia and Poland, led him to believe that these economic ‘reforms’ could succeed only if liberal political reforms didn’t precede these. When Gorbachov introduced glasnost and perestroika in the USSR, Deng warned against it saying that it would endanger the very existence of the Soviet Union. Many contemporaries have described in their memoirs that Gorbachov was an ‘idiot’ in Deng’s view. Deng believed that backward Chinese society did not have the ‘cultural maturity’ to handle the contradictions and factionalism that would emerge from bourgeois liberal political reforms and it would disintegrate into pieces. Therefore, Deng considered only limited right of criticism and expression under the Communist Party’s rule and centralized control to be necessary for these economic reforms and, to the displeasure of all his Western bourgeois admirers, did not hesitate to take firm military action in Tien An Men Square.

The reality is that what is called bourgeois parliamentary democracy is not the natural political form of capitalism in all cconditions, but only the political form of capitalism developed in the age of free competition. When some individual capitalists did not have the ability to dominate the market decisively and all could compete freely, there existed the scope for free political competition of parliamentary politics among bourgeoisie. As soon as capitalism reached the stage of monopoly, parliamentary democracy became a hindrance to it. That is why the post-monopoly era capitalist development mostly did not take stable parliamentary form in the countries becoming independent in the 20th century. Only Indian capitalism could sustain parliamentary democracy for the longest time, that too after completely hollowing it from within. Therefore, parliamentary democracy cannot be the basis for the capitalist transformation of the former socialist societies. It hasn’t happened in these countries, all moving towards authoritarianism or fascism in some form. CPC under the leadership of Deng did not entertain this illusion of transformation into bourgeois democracy and it is the one which went farthest in capitalist development.

In the era of monopoly capitalism, even in older parliamentary democracies, the power is under the control of the biggest monopoly capitalists and works mostly in their interest. It has become impossible now to distinguish between private and state ownership, between the interest of the nation and the corporates. Therefore, the absence of parliamentary democracy or state capitalism with a one-party autocracy is not a hindrance to the interests of the bourgeoisie and private corporate capital. Rather, in the age of neoliberal capitalist economic policies, every capitalist country is gradually taking on a more or less fascist character to some extent. ‘The Economist’, mouthpiece of the oldest and most mature British capitalism, while expressing this truth, is openly welcoming state-owned capitalism and calling it beneficial for rapid economic growth.

But the fact remains that after taking the path of capitalist development, its objective rules cannot be ignored, and they continue to work independent of one’s will and willingness. All efforts to prevent or break the monopolies could not succeed in US, and neither would they succeed in China. Similarly, the US and European capitalist countries could not prevent the financial crisis with measures such as monetary easing and low interest rates, and China would not, too. The path of capitalist development is bound to create economic crises and suffer all kinds of financial and credit crises, business collapses, closures, bankruptcies, stagnation, layoffs, unemployment, pauperism, etc. Chinese exceptionalism is purely wishful thinking. China’s economy is still based upon commodity production. The fact that a large amount is state owned doesn’t change that; it is still commodities produced using wage labour and sold on the market for money. What China faces is Marx’s ‘overproduction’ where the production gets ahead of what the market can realise in the longer term. The excessive leverage becomes credit crunch, financial crisis & recession and not just the fictitious capital gets devalued/destroyed, so does real productive capital & so do jobs.