China’s growth rate remains impressive, even if on the decline. The country’s continuing economic gains owe much to the Chinese state’s (1) still considerable ability to direct the activity of critical economic enterprises and sectors such as finance, (2) commitment to policies of economic expansion, and (3) flexibility in economic strategy. It appears that China’s leaders view their recently adopted One Belt, One Road Initiative as key to the country’s future economic vitality. However, there are reasons to believe that this strategy is seriously flawed, with working people, including in China, destined to pay a high price for its shortcomings.
Chinese growth trends downward
China grew rapidly over the decades of the 1980s, 1990s, and 2000s with production and investment increasingly powered by the country’s growing integration into regional cross-border production networks. By 2002 China had become the world’s biggest recipient of foreign direct investment and by 2009 it had overtaken Germany to become the world’s biggest exporter. Not surprisingly, the Great Recession and the decline in world trade that followed represented a major challenge to the county’s export-oriented growth strategy.
The government’s response was to counter the effects of declining external demand with a major investment program financed by massive money creation and low interest rates
Interest rates
When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…
The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
. Investment as a share
Share
A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings.
of GDP
GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
rose to an all-time high of 48 percent in December 2011 and remains at over 44 percent of GDP.
But, despite the government’s efforts, growth steadily declined, from 10.6% in 2010 to 6.7% in 2016, before registering an increase of 6.9% in 2017. See the chart below. Current predictions are for a further decline in 2018.
Beginning in 2012, the Chinese government began promoting the idea of a “new normal”—centered around a target rate of growth of 6.5%. The government claimed that the benefits of this new normal growth rate would include greater stability and a more domestically-oriented growth process that would benefit Chinese workers.
However, in contrast to its rhetoric, the state continued to pursue a high grow rate by promoting a massive state-supported construction boom tied to a policy of expanded urbanization. New roads, railways, airports, shopping centers, and apartment complexes were built.
As might be expected, such a big construction push has left the country with excess facilities and infrastructure, highlighted by a growing number of ghost towns. As the South China Morning Post describes:
This building boom was financed by a rapid increase in debt, creating repayment concerns. Corporate debt in particular soared, as shown below, but local government and household debt also grew substantially.
The boom also caused several industries to dramatically increase their scale of production, creating serious overcapacity problems. As the researcher Xin Zhang points out:
Not surprisingly, this situation has also led to a significant decline in economy-wide rates of return. According to Xin Zhang:
In other words, it was becoming increasingly unlikely that the Chinese state could stabilize growth pursuing its existing strategy. In fact, it appears that many wealthy Chinese have decided that their best play is to move their money out of the country. A China Economic Review article highlights this development:
Chinese leaders were not blind to the mounting economic difficulties. Limits to domestic construction were apparent, as was the danger that unused buildings and factories coupled with excess capacity in key industries could easily trigger widespread defaults on the part of borrowers and threaten the stability of the financial sector. Growing labor activism on the part of workers struggling with low salaries and dangerous working conditions added to their concern.
However, despite earlier voiced support for the notion of a “new normal” growth tied to slower but more worker-friendly and domestically-oriented economic activity, the party leadership appears to have chosen a new strategy, one that seeks to maintain the existing growth process by expanding it beyond China’s national borders: its One Belt and One Road Initiative.
The One Belt, One Road Initiative
Xi Jinping was elected President by the National People’s Congress in 2013. And soon after his election, he announced his support for perhaps the world’s largest economic project, the One Belt, One Road Initiative (BRI). However, it was not until 2015, after consultations between various commissions and Ministries, that an action plan was published and the state aggressively moved forward with the initiative.
The initial aim of the BRI was to link China with 70 other countries across Asia, Africa, Europe, and Oceania. There are two parts to the initial BRI vision: The “Belt”, which seeks to recreate the old Silk Road land trade route, and the “Road,” which is not actually a road, but a series of ports creating a sea-based trade route spanning several oceans. The initiative was to be given form through a number of separate but linked investments in large-scale gas and oil pipelines, roads, railroads, and ports as well as connecting “economic corridors.” Although there is no official BRI map, the following provides an illustration of its proposed territorial reach.
One reason that there is yet no official BRI map is that the initiative has continued to evolve. In addition to infrastructure it now includes efforts at “financial integration,” “cooperation in science and technology,”, “cultural and academic exchanges,” and the establishment of trade “cooperation mechanisms.”
Moreover, its geographic focus has also expanded. For example, in September 2018, Venezuela announced that the country “will now join China’s ambitious New Silk Road commercial plan which is allegedly worth U.S. $900 billion.” Venezuela follows Uruguay, which was the first South American country to receive BRI funds.
Xi’s initiative did not come out of the blue. As noted above, Chinese economic growth had become ever more reliant on foreign investment and exports. And, in support of the process, the Chinese government had used its own foreign investment and loans to secure markets and the raw materials needed to support its export activity. In fact, Chinese official aid to developing countries in 2010 and 2011 surpassed the value of all World Bank
World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.
It consists of several closely associated institutions, among which :
1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;
2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;
3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.
As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
loans to these countries. China’s leading role in the creation of the BRICs
BRICS
The term BRICS (an acronym for Brazil, Russia, India, China and South Africa) was first used in 2001 by Jim O’Neill, then an economist at Goldman Sachs. The strong economic growth of these countries, combined with their important geopolitical position (these 5 countries bring together almost half the world’s population on 4 continents and almost a quarter of the world’s GDP) make the BRICS major players in international economic and financial activities.
New Development Bank, Asia Infrastructural Investment Bank and the proposed Shanghai Cooperation Organization Bank demonstrates the importance Chinese leaders place on having a more active role in shaping regional and international economic activity.
But, the BRI, if one is to take Chinese state pronouncements at their word, appears to have the highest priority of all these efforts and in fact serves as the “umbrella project” for all of China’s growing external initiatives. In brief, the BRI appears to represent nothing less than an attempt to solve China’s problems of overcapacity and surplus capital, declining trade opportunities, growing debt, and falling rates of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. through a geographic expansion of China’s economic activity and processes.
Sadly this effort to sustain the basic core of the existing Chinese growth model is far from worker friendly. The same year that the BRI action plan was published, the Chinese government began a massive crackdown on labor activism. For example, in 2015 the government launched an unprecedented crackdown on several worker-centers operating in the southern part of the country, placing a number of its worker-activists in detention centers. This move coincided with renewed repression of the work of worker-friendly journalists and activist lawyers. The Financial Times noted that these actions may well represent “the harshest crackdown against organized labor by the Chinese authorities in two decades.”
And attacks against workers and those who support them continue. A case in point: in August of this year, police in riot gear broke into a house in Huizhou occupied by recent graduates from some of China’s top universities who had come to the city to support worker organizing efforts. Some 50 people were detained; 14 remain in custody or under house arrest.
A flawed strategy
To achieve its aims, the BRI has largely involved the promotion of projects that mandate the use of Chinese enterprises and workers, are financed by loans that host countries must repay, and either by necessity or design lead to direct Chinese ownership of strategic infrastructure. For example, the Center for Strategic Studies recently calculated that approximately 90% of Belt and Road projects are being built by Chinese companies.
While BRI investments might temporarily help sustain key Chinese industries suffering from overcapacity, absorb surplus capital, and boost enterprise profit margins, they are unlikely to serve as a permanent fix for China’s growing economic challenges; they will only push off the day of reckoning.
One reason for this negative view is that in the rush to generate projects, many are not financially viable. Andreea Brinza, writing in Foreign Policy, illustrates this problem with an examination of European railway projects:
Another reason to doubt the viability of the BRI is that a growing number of countries are becoming reluctant to participate because it means that they will have to borrow funds for projects that may or may not benefit the country and/or generate the foreign exchange necessary to repay the loans. As a result, the actual value of projects is far less than reported in the media. Thomas S. Eder and Jacob Mardell make this point in their discussion of BRI activities with 16 Central and Eastern European countries (the 16+1):
Because of these investment requirements, many countries are either canceling or scaling back their BRI projects. The South China Morning Post recently reported that the Malaysian government decided to:
Myanmar is, as Reuters reports, one of those countries:
A third reason for doubting the viability of the BRI to solve Chinese economic problems is the building political blowback from China’s growing ownership position of key infrastructure that is either the result of, or built into, the terms of its BRI investment activity. An example of the former outcome: the Sri Lankan government was forced to hand over the strategic port of Hambantota to China on a 99-year lease after it could not repay its more than $8 billion in loans from Chinese firms.
Unfortunately, Africa offers many examples of both outcomes, as described in a policy brief survey of China-Africa BRI activities:
Adding to political tensions is the fact that many BRI projects “displace or disrupt existing communities or sensitive ecological areas.” It is no wonder that China has seen a rapid growth in the number of private security companies that serve Chinese companies participating in BRI projects. In the words of the Asia Times, these firms are:
What lies ahead?
The reasons highlighted above make it highly unlikely that the BRI will significantly improve Chinese long-term economic prospects. Thus, it seems likely that Chinese growth will continue to decline, leading to new internal tensions as the government’s response to the BRI’s limitations will likely include new efforts to constrain labor activism and repress wages. Hopefully, the strength of Chinese resistance to this repression will create the space for meaningful public discussion of new options that truly are responsive to majority needs.
Originally published: Reports from the Economic Front (October 2, 2018)
Source: Monthly Review Foundation
is Professor Emeritus of Economics at Lewis and Clark College, Portland, Oregon; and Adjunct Researcher at the Institute for Social Sciences, Gyeongsang National University, South Korea. His areas of teaching and research include political economy, economic development, international economics, and the political economy of East Asia. He is also a member of the Workers’ Rights Board (Portland, Oregon) and maintains a blog Reports from the Economic Front where this article first appeared.