China’s Man-Made Economic Travails

By Kumar David –February 14, 2016 

Prof. Kumar David

The economic downturn in China is serious, but different from global capitalism in the way it is unfolding, how the state is responding and in its medium turn prospects. Obviously they influence each other but it is different because the structure of the Chinese economy does not replicate Western capitalism. It is partly capitalist and partly state owned; it is a duck-billed platypus, neither mammal nor bird as I often say. Central and regional governments drive domestic decisions while the external economy is swayed by import-export markets and the fortunes of the yuan in currency exchanges. The market (household spending and property development) do have an impact – as does pervasive corruption – but the Centre dominates with directives and giant infrastructure projects. Provincial governments too invest heavily, and direct enterprises. Central control of banks is tight. Laissez faire capitalism does not lead the economy; the writ of Party and bureaucracy, not markets, runs. The state-cum-capitalist domestic economy is characterised by two words, Control & Balance.

It’s a different story in the external sector; when China’s exports have a hard time, imports also nosedive pushing global mineral, raw-material and oil producers into a spin. If confidence loss leads to capital flight and servicing central, provincial and corporate debt due to past overinvestment creates debt servicing pressure, the value of the yuan dips. China’s (mainly domestic) gross debt is 300% of GDP; too large to inflate away despite a deflationary global environment. This portends rising central and provincial government deficits.

For two decades the country has been the workshop of the world but Vietnam, Mexico, South Korea, India and others are gaining ground and competition is intensifying. Manufacturing, the heart of the economy, is contracting. Partly for this reason, and more significantly to placate stirring class pressures at home, the Party has been compelled to do the obvious; make a transition from investment led expansion to consumption geared development. China is in the throes of a transition from a mad investment and industrial export-driven rush to a domestic consumption oriented paradigm. So far consumption accounts for only 35% of output in China compared to 70% in the US.

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