Is the recession really over?

Much spinning in the media in recent months trying to talk up recovery from the present recession, with headlines this past week that the recession really is over – based of course on the governments own data. We all trust the government and its advisers don’t we?

However whilst stock exchanges may be starting to fly again, and bankers make like they never nearly crashed the world’s financial systems last year, the reality of the situation may lie somewhere behind the hopeful headlines and spin.

For a more down to earth view check out Will Brown‘s article below, ‘Can China Save The World Economy?’, and come and discuss the topic with him at the bookfair on Saturday (room 2, 4pm). You can also find some interesting articles/links on China here. Meanwhile our friends at East Bristol Debtors Alliance have issued an impassioned plea for the cancellation of all personal debt, because its literally killing a lot of people. They’ll be taking this discussion further on Saturday too (room 1, 12 noon), as well as looking at what we can do locally in solidarity with those who have bailiffs and other debt collecting scum at the door.

Can China Save The World Economy? (by Will Brown)

China has stumbled on to the world stage like a nervous elephant. Rapid industrial growth means it is now the world’s greatest exporter, the biggest market for iron ore, copper and bauxite, and the largest holder of US government debt. This year it overtook the USA as the world’s biggest car market. Six months ago, with the world economy on its knees, what China said and did suddenly mattered very much. There is no evidence the Chinese leadership foresaw the crash any better than Wall Street or the City. But its response over the last 6 months has played a large part in an unexpectedly rapid recovery. House prices in the US and UK stopped falling in May, no major bank has collapsed for 6 months and the stock markets globally have risen 20% since March. It is unclear whether this recovery will be sustained – but China will certainly play a significant part in determining the worlds’ future.

The crash of the last 2 years has been comparable in scale and extent to the Wall Street Crash of 1929. Would a Great Depression follow? The response of the worlds’ governments has been very different this time. Central banks have poured money into tottering financial empires – in the 30’s they refused and were unable to stop waves of bank failures. In the 30’s; France, England and the USA were at loggerheads over trade and currency policy. Vicious tariff wars led to a collapse of world trade. This time round, despite sharp tensions, global central bank policy has remained relatively coordinated and harmonious. And China, the new economic power, with an economy under significant state control, has launched a spectacular reflation.

Chinese growth has been a major part of this recovery story. The Chinese economy stopped growing in the middle of last winter as millions were laid off from the export industries supplying the US and European markets. 20 million migrant workers lost their jobs in the export province of Guandong alone. The Chinese government responded with massive increase in lending by the countries’ state controlled banking sector. Incentives have been dished out for consumers to buy cars and kitchen appliances. And direct state spending kick-started the economy with massive public works on infra-structure projects -thousands of miles of new railways and roads and dozens of new airports.

This recovery has already lifted prices of raw materials like iron ore and copper which in turn has boosted the economies of Australia and Brazil and the stocks of giant miners Rio Tinto Zinc, Vale and BHP.

Despite the apparent success of the Chinese CP in dealing with the crisis, deep tensions and uncertainty cloud the picture. On July 27th a Chinese steel executive was beaten to death by workers angered at the threat to their jobs by privatisation. The riot, in north east China, involved up to 30,000 workers of the Tonghua Iron and Steel works. The owner, Jilin province, wants to sell it to privately held Jianlong Group. An interim manager, Chen Guojun, sent in by Jianlong, infuriated employees by his high-handed manner and threats to lay off most of the staff. Human rights groups report that retired steel workers were paid only Rmb200 a month while Mr Chen was being paid Rmb3million annually. Thousands of irate workers surrounded Mr Chen in his office and beat him unconscious. They then battled riot police for several hours, preventing medical help reaching Mr Chen, who later died. Jianlong Group is owned by Zhang Zhixiang, China’s tenth richest capitalist with a fortune of $2.9billion. Large sections of the Chinese steel industry have been privatised in recent years with 50 million state workers sacked in the 90’s. But there is no longer a growing export trade to take up the slack.

Western expectations that China will develop democratic structures as it industrialises have failed to materialise to date. Unlike the former Soviet Union and Eastern Europe, the Chinese Communist Party retains a monopoly of political power. This is symbolised by their rigid control of the Internet. The State polices search engines. Government censors ordered a block on searches related to corruption in Namibia because it involved a company formerly run by the son of President Hu Jintao. Google has cut a deal and supplies a censored version of its search engine to China – Google.ch – which has 30% of the market. But there are deep reservations in the US Internet industry about colluding with such control, partly because it is regarded as a means of blocking US software exports. There have also been serious social tensions in China’s Western provinces. Nearly 200 people reportedly died in rioting in the western province of Xinjiang in July and tensions appear to remain high in the province between Han and Uighur ethnic groups.
Reporting was limited with the Internet heavily censored and social networking sites such as Facebook and Twitter shut down.

There are serious doubts about China’s ability to sustain growth and maintain social peace. The Chinese real estate market and the Shanghai stock market have roared ahead since March. The stock market is up 60% over 4 months. Over 100,000 new day traders have signed on every week to play the market. Many of the new loans made by the banks are considered to be of dubious quality. There are fears that much of the increased bank lending has simply been poured straight into the stock and housing market, leading to a new bubble. It is not clear that China’s domestic consumption will be strong enough to make up for the lost export trade.

Since the historic visit in Feb 1972 by Richard Nixon to China, the developing US/Chinese relationship has been critically important. The first bilateral meeting of the Obama administration was between officials of the two countries. The US is the largest market for Chinese exports. This has generated a huge Chinese surplus of $2,000 billion. China has used this money to buy US government bonds. Any hint that it might stop sees the dollar collapse. If China did stop, the US government would have to slash spending, the US economy would shrink and Americans will stop buying Chinese exports. Because of the humiliating collapse of US banking industry, US influence in Beijing has weakened. But the US needs to borrow more money than ever, selling government bonds to pay for the bail out of the US banking and car industry.

‘The Chinese leadership understands very well that their economy is locked into a difficult and unhealthy embrace with the US and would like to tear themselves away from it’ says Eswar Prasad of the Brooking Institute ‘ much as they detest it, the embrace is only going to get tighter in the short run’.

With its enormous hoard of foreign exchange and increased international economic links, Chinese investment overseas has rocketed. The third largest Chinese bank has started offering mortgages to British borrowers that undercut established UK lenders. It is moving into a mortgage market starved of funds with mainline UK banks reluctant to lend money. Combined with its influence on HSBC, China will have a growing presence in the UK economy.

Since Lehman Bros collapsed, Chinese companies have gone on an unprecedented buying spree. They have bought $50billion dollars worth of foreign companies. 2/3rds of deals have been in mining or energy – Chinese companies have been buying foreign companies that control raw materials. Half have been in developed economies, half in developing economies. Though welcomed in much of the third world as investors without an imperialist tradition, China is likely to use its influence to protect its assets. Control of the Internet may become a technology it is tempted to export.

Dark clouds still loom over the world economy. As Gillian Tett points out in the Financial Times, the machine of international finance has re-assembled itself like Terminator 2 from the wreckage of the crash. The political clout of Wall Street and the City is busily undermining attempts to radically curb the power of international capital. Mega banks like HSBC, with 128 million customers,1/3rd million employees and $20billion profit will not be easily controlled. These giant banks specialise in regulatory and tax arbitrage, bullying countries into competing for capital and jobs. And while the banks are trying to carry on as if nothing has happened, governments cannot keep spending for ever. The world’s industrial powers have written blank cheques to save their financial systems, none more so than the UK. We haven’t begun to start paying the price.

The limits of emergency government spending are being reached. The reform of the world financial system is yet to be agreed, let alone implemented. And while everyone knows China is centre stage, no one is sure what she will do next. The Copenhagen Climate Conference promises to be historic: will we see the embryo of a world government, a glimpse of a world under Chinese leadership or trans-national capital reasserting control? And the problem remains. Capitalism has, since 1650, delivered two things. It has delivered long run economic growth. This now appears to pose a threat to the eco system. Yet this growth has been repeatedly interrupted by bitter economic crises. Which, if the last 2 years is any guide, pose a massive threat to a system that now embraces all humanity in webs of trans-national capital beamed by the Internet. It is far from clear that China will provide the transformation the world needs. Even if it can shut down Facebook.