Winter is Coming – on the situation in China

15 December 2017

As China’s economic, political and geo-strategic role increases, Charlie Hore assesses the position of China today and outlines a number of key challenges that face the leadership

Introduction

In October, the 19^th Congress of the Chinese Communist Party (CCP) ended with ‘paramount leader’ Xi Jinping becoming seemingly more powerful than any Chinese leader since Mao Zedong.

Following Mao’s autocratic rule up to his death in 1976, his successors brought in rules supposed to ensure that no one person could become so powerful again: the General Secretary serves for a maximum of ten years, and members of the seven-man Politburo Standing Committee (PSC), the inner core of the ruling class, must retire at 68. The make-up of the PSC announced at the end of the Congress means that at least one of those rules will have to be broken at the next Congress scheduled for 2022.

The Congress also wrote into the CCP constitution a new guiding ideology, snappily-entitled ‘Xi Jinping Thought on socialism with Chinese characteristics for a new era’. (There’s an orientalist myth that this sort of jargon sounds better in the original Chinese: it really, really doesn’t). Again, this is the first such recognition for a living leader since Mao.

It’s rather less clear what Ji Jinping Thought actually means, or for that matter what the ‘new era’ will consist of, but a number of key themes emerged from the congress that add up to a renewed assertion of the power of the state, both at home and on the international stage.

One Belt, One Road

China’s rise to becoming the world’s second largest economy has involved becoming not only the biggest exporter, but also the biggest importer, and consequently gaining huge power over the economies of supplier countries. Yet China’s rulers have so far been chary of asserting this openly, preferring to deploy “soft power” to extend their influence without seeming too pushy. The “One Belt, One Road” initiative breaks with this approach in being an overt challenge to Western domination of the world economy.

The initiative is still taking shape, but at its heart is the world’s largest ever programme of infrastructure construction – allowing for inflation, seven times the amount of investment in Western Europe after World War 2 under the Marshall Plan. China plans to expand rail, road and port capacity in over 60 countries, strengthening land routes to Europe across Asia and the Middle East and sea routes in the Indian and Atlantic oceans, as well as expanding its access to raw materials in Africa and south Asia. The Americas, north and south, are notably absent from the plans. (For a more detailed analysis of the initiative see this article from Socialist Worker (US).

This assertiveness is also evident in the pursuit of China’s claims to islands in the South China Sea, and in the promotion of China’s political system as a “model” for other countries to follow. And although the new approach predated Donald Trump’s election, Xi Jinping clearly sees Trump’s isolationism as opening up space for China. He pointedly referred to China being in the driving seat over global warming, and talked of the importance of sustaining the institutions of the world economy, in clear contrast to the USA’s withdrawal.

This is not about China taking over the USA’s position as the major world power, as many American commentators argue, rather China insisting on being a power to be reckoned with. As the USA’s economic and political power declines, China is signalling its arrival as a world power, with very deep capital reserves to invest abroad, and the ability to think strategically decades ahead.China’s evolution

The irony is that the “China model” that Xi was lauding has serious weaknesses, which he had to spend most of his speech addressing. Those weaknesses include a growing ecological crisis, slowing growth in the economy, unsustainable levels of state debt, and corruption at all levels of the state bureaucracy. None of these are new, nor will they be easy to resolve. Xi deliberately set out a long-term perspective for becoming “a fully modern economy and society”, which stressed the central role of the state in directing both economy and society.

China’s cities have some of the worst air pollution in the world; the water table is falling across northern China; official figures admit that over half of China’s rivers are either seriously polluted or toxic; and some of the largest popular mobilisations in recent years have been against chemical-producing or polluting factories. Environmental degradation is thus one of the most pressing issues facing China, and one which carries a variety of political dangers.

China has long been a leader in renewable energy, though much of this has come from hydro-electric power (dams), which has very high environmental costs. This has not been driven primarily by ecological concerns – China’s coal reserves are concentrated far from the major industrial centres, and onshore oil production peaked several decades ago, causing China to become the world’s biggest oil importer. Huge sums are now being invested in solar and wind power, with 42% of new global wind capacity being installed in China in 2016, yet coal and oil will continue to be major power sources for decades yet.

There have been major efforts to rein in the worst polluting factories, but local officials’ independence from higher authority has frustrated much of this. One 2009 survey found that 15% of all construction projects began without approval, and one in ten factories closed for pollution had reopened without permission.[1] The economic crash of 2008 has also made this worse, as factory managements cut costs to remain competitive.

China’s explosive economic growth from 1990 onwards was powered by a huge rise in exports to the USA and Europe, as major manufacturers moved production to south-eastern China. 2008 then hit the economy hard, with some 20-25 million workers losing their jobs as exports plummeted. However, China recovered faster than other countries, as the government made huge amounts of credit available for building projects – housing, railways, road, ports and the like – to stimulate the economy and create demand for key industries like steel and concrete.

But the stimulus was only intended to be temporary, and has led to large increases in debt. Growth rates have steadily drifted down over the last few years, leading some commentators to talk about a ‘meltdown’, particularly after China’s stock markets crashed in 2015 and 2016. In reality, just as China’s expansion was over-hyped, so the decline in growth rates has also been exaggerated.

In 2016, growth was at its lowest for 27 years, but still far higher than most Western economies. There seems to be an acceptance that the period of high growth is over, with the stress now on services and increasing consumption (including unlocking workers’ savings), a lot more overseas investment, and reducing debt and tackling corruption in order to extend the central state’s control over the economy and cut waste.

The market, corruption and debt

One of the key changes in the 1980s reforms was redistributing economic power to provincial, county and lower authorities and factory managements, in an effort to introduce “market dynamism” into the state sector. The idea was that local officials and managers would learn to think like entrepreneurs, and make local economies more flexible and able to take advantage of opportunities. This worked even better than expected, and the local state was one of the key drivers of economic growth in the 1980s and 1990s. The downside of course was that the officials and managers learned to think like entrepreneurs in other ways, and corruption became endemic.

Debt and corruption go hand-in-hand as products of the relative independence of lower officials from the central state – an independence that Xi Jinping is determined to rein in, as part of the project of reasserting the control of the central state. But they do have rather different origins. Corruption has always been opposed, and there have been periodic crack-downs which have led to senior CCP figures being jailed or even executed, with former Politburo member Bo Xilai being the highest-ranking target some years ago.

Public debt, on the other hand, has until recently been encouraged. China’s debt problem is very different from those of western economies, however, and a lot of Western commentary ignores this basic fact.

China’s total debt is a lower proportion of GDP than the USA’s – 250% of GDP compared to the USA’s 330% a year ago. Almost all of the debt is owned by Chinese banks – overseas debts are a very small proportion, far smaller than China’s dollar mountain. And although household debt is rising fast, the great majority of the debt is still owed by factories and local governments. China’s debt problem is essentially parts of the state owing other parts of the state eye-watering amounts of money – which makes it easy to solve short-term crises by simply rolling over the debts.

That doesn’t mean it isn’t a real problem, though. In the first place, what this signals is that relatively inefficient units if capital are using up credit that could be better deployed by more efficient units. More fundamentally, it points to a major problem about productivity – almost forty years of market reforms have failed to make state-owned industry more competitive and significantly reduce labour costs.

The speed at which debt has been rising is also a major headache, as is the fact that much of it is diverted from its original purposes into secondary markets which allow corrupt managers and officials to either undertake investments that the central state are trying to shut down or to simply loot it for their private gain.

But while the need to rein in debt is obvious, there is no simple way of doing this. Choking off all credit can work, but at the risk of hurting the healthy parts of the economy, while reorganisation can get individual enterprises out of trouble, but mostly by increasing the debts of the banking sector. Wholesale closures might just work – and are the preferred remedy for most Western commentators – but the political risks are simply too great.

Can it all work?

The last five years have seen a steady increase in state repression of intellectuals, workers organisations and anyone else seen as stepping out of line, and the attacks on corruption and debt are part of that tightening of the screw. Xi’s mission is to increase the power of the state over society and the economy, and within that strengthen the control of the central state over lower-level officials and managers.

There is a similar ambition to project China’s authority on a world scale, not least to take advantage of the decline of the US’ power, and that of the West more generally. No other ruling class in the world today could confidently set themselves thirty-year goals, and a plausible strategy for achieving them.

Trump’s whirlwind tour of Asia shortly after the CCP Congress both acknowledged China’s power and unveiled a new strategic concept – ‘the Indo-Pacific’. The idea is an alliance between the USA, India, Australia and Japan to counter China’s influence, though it’s not clear whether this is a military or simply economic alliance. The plan has already been criticised by the Indian strategist who originally coined the term, but it does highlight two real problems that China faces.

The first is that the decline of US power has created space for other countries to increase their influence, so China is contending with a number of different Asian countries that want to limit its influence. One sign of this is the revival of the Trans-Pacific Partnership (TPP) without US participation.

The TPP was the economic wing of Obama’s military Pivot to Asia, a twin-track strategy to enable a revival of US power in Asia by taking advantage of fears over China’s growth. Two days after being sworn in, Trump killed off the TPP as part of his reassertion of protectionism to ‘Make America Great Again’. Now the other governments involved have decided to revive it, in a clear snub to both Trump and Xi Jinping.

The second problem is that both the ‘belt’ and the ‘road’ have a great number of links, and depend greatly on the goodwill of every participating government. As this article rather smugly outlines, the list of things that could go wrong is impressively long.

And then there’s North Korea, in many ways China’s most intractable foreign policy problem, not least because throwing money at it offers no solution. China can neither afford to let the regime collapse, for fear of either chaos or American troops on its northern border, nor allow it to continue on its current course of antagonising the US and South Korea. A Zimbabwean-style coup would almost certainly be the preferred solution; unfortunately for China, the Kim family’s habit of pre-emptively taking out possible threats leaves them short of likely candidates.

Internally, the problems of debt and corruption, the independence of the lower levels of the bureaucracy, and the ecological crisis all pose serious risks to the new strategy. For the moment, opposition from below is at a low point.

In Tibet and Xinjiang, nationalist struggles against Chinese occupation have been less visible over the last few years due to heightened repression and large-scale Han Chinese migration. Xinjiang is pivotal to the ‘belt’ part of China’s overseas expansion, and also a major source of oil and gas, and thus is vulnerable to terrorist attacks from separatists. For now, however, their capacity to act has been greatly reduced, Tibet is economically less important apart from as a source of raw materials (about which I recently wrote in Jacobin), and there is thus even less reason to move away from the repressive strategy which seems to have worked.

In the cities, strikes and other forms of social opposition have not gone away, but there are fewer, and those struggles that do break out are almost entirely defensive. The China Labor Bulletin (CLB) strike map shows that almost every recent strike has been in protest against wage arrears – a growing problem given the slow-down in economic growth. It’s important to note, however, that this is a drop-off from a previous high point – the CLB recorded almost twice as many strikes in 2016 as in 2014, and strikes are increasing in service and white-collar industries as they fall away in manufacturing.

The reduction is a product of both greater repression but also more state intervention against ‘rogue’ employers. CLB highlight the changed situation in Dongguan, Guangdong province, the epicentre of strike action in 2014 and 2015, where strikes have fallen off markedly as local authorities have become involved in reducing employers’ failure to pay wages. However, they also note:

Although there is still a large manufacturing base in Dongguan it is now a shadow of its former self. Tens of thousands of small and medium-sized enterprises, particularly those in low cost and labour intensive industries such as garment, shoe and toy manufacturing, have already moved out of Dongguan over the last decade. The manufacturing enterprises that are left tend to be larger, more stable businesses that can afford to pay better wages and are less likely to see labour disputes arise.

Paradoxically, the greater potential threat from below comes not from the growth but from the shrinking of the working class. China’s workforce peaked in 2011, and has been declining since then. The working-age population fell by 20 million in the five years after 2011, and is projected to fall from just over 900 million people now to 700 million by 2050 (note that this is the total working-age population, including the state apparatus, self-employed and peasants – the numbers for the industrial working class will be significantly smaller).

This is a direct result of the ‘one-child policy’, instituted in 1979 and effectively abolished in 2015. The shrinking gives workers greater choice of jobs and thus limits both employers’ ability to cut wages and the ruling class’ policy options.

One of the solutions outlined by Xi Jinping for is increasing consumption. But getting workers to spend more money involves reducing the reasons why they save (to pay for now-privatised education and healthcare, as well as major family expenses such as weddings), as well as ensuring a steady growth in real wages. It also has major resource implications given commodity shortages and the steady reduction in agricultural land and output over the last 20 years (China has for over a decade been a net importer of food).

When China’s economy began to falter, the Western press began to talk of China’s ‘crisis’, an analysis that now seems quite overblown. For now, China’s rulers seem to be managing the reduction in growth rates to half of what they were a decade ago without serious upheaval. But to carry out Xi’s ambitious plans, they have to deliver the higher living standards that that have promised, and that workers are coming to expect, against the continued prospect of lower growth for the foreseeable future.

Winter is coming

The recent mass evictions in Beijing highlight a number of the problems with this strategy. Some 200,000 people have been evicted in recent weeks from migrant workers’ shanty-towns on the edges of Beijing. Officially, this is driven by the need to enforce building regulations, and to cut down on coal-burning to cut pollution. In reality, it is about clearing potentially lucrative real estate to improve the “quality” of Beijing’s population.

As one account noted, ‘Images of demolished buildings and streams of weary people look more like a city under siege than a major metropolis — fitting, since the state has declared all-out war on its urban underclass.’

While there has been little overt resistance, large numbers of Beijing residents have organised help for those being evicted, and a storm of protest has erupted on social media. Much of this has been couched in terms of the impact on settled residents’ lives – where will our nanny live? who will I buy street food from? – but this still represents a higher level of protest than anything seen in Beijing for many years.

It also points to the fundamental contradiction in what the city authorities are doing – transforming Beijing into a middle-class services economy city requires huge number of low-paid workers to build, clean, cook and provide all the other services that make the city run. How far out of the city can the “low-end population” be pushed before their commute becomes simply impossible?

And at what point do people take to the streets? While the government cannot know that, it nevertheless has to factor in what it things the limits of people’s endurance might be. One sign of that is the sudden U-turn over winter heating earlier this month. There has for some time been a major project to switch households to gas instead of coal across northern China, but shortages of gas supplies have left many without any reliable fuel supply. As winter begins to bite, the government has just instructed local authorities to life the ban on coal and make supplies available. It’s a small example, but it illustrates how the possibility of popular reactions constrains what can often seem like absolute power.

As one astute if slightly paranoid factory owner told a researcher a few years back:

China is different from other countries. In the West, it is the rich people who influence politics and the government fears the rich. Now, in China, it is the rich who fear the government and the government fears the poor. The poor have a high potential to threaten social stability and social order. [2]

That potential continues to overshadow Xi Jinping’s ‘new era’.

References

[1] Elizabeth C Economy, The river runs black, (Cornell University Press, 2010), p. 211.

[2] Quoted in Chris King-Chi Chan, The challenge of labour in China, (Routledge, 2010), p 161.

Charlie Hore has published extensive online articles on China in a variety of left websites. The links below are to the main pieces he has published:

For rs21:

https://rs21.org.uk/2016/01/20/the-unofficial-cult-of-mao-instability-in-modern-china/

https://rs21.org.uk/2015/10/24/five-books-you-should-read-on-china/

https://rs21.org.uk/2015/07/15/bubbles-bounces-and-soft-landings-chinas-stock-market-implodes/

https://rs21.org.uk/2014/05/29/the-may-of-the-masses-the-tiananmen-square-movement-25-years-on/

On Tibet for Jacobin:
https://www.jacobinmag.com/2017/02/tibet-china-tar-self-determination-mao-dalai-lama/

For the International Socialist Review (ISR):