China:
Is High Growth - High Risk Liberalization The Only Alternative?
By James Petras
13 September, 2007
Countercurrents.org
Introduction
Dynamic growth, large-scale
financial speculation and overseas expansion are accompanied by deeper
and more pervasive social and economic problems, which can undermine
sustained growth and political stability.
China’s Dynamic
Economic and Financial Growth
By now the world is aware
of China’s unprecedented prolonged double-digit growth rates in
GDP, exports, manufacturing and other economic sectors. Economists and
Central Bankers have taken notice of China’s $1.5 trillion dollar
reserves, $3 trillion dollar savings and the rapid growth of millionaires
and billionaires. Moreover, despite US and European financial market
turbulence in mid 2007, China’s trade balance for July 2007 was
a near record $24.4 billion dollars, its exports grew by 34% despite
rising oil imports and reductions in rebates to exporters and interest
rate increases. China’s GDP is expected to grow at nearly 11%
for 2007 (Financial Times July 20, 2007), the highest rate of growth
in the new millennium.
While US politicians, pundits
and trade union bosses continue to fume about China’s low wage
advantages (cheap labor) and ‘unfair trade’, Beijing is
moving on to a new advanced stage of capitalism – large-scale,
long-term investment in research and development (R&D), large-scale
private and public overseas investments in Africa, Asia and the United
States and big investments in high tech industries linked to manufacturing.
China’s major banks and corporations are ‘going public’
– offering shares to private investors and raising $52 billion
dollars in the first 6 months of 2007- making China the world’s
leading center for share offering (Financial Times, July 5, 2007). Over
$1,300 billion dollars of Chinese savings are about to flow into global
bond and equity markets as liberalization spreads (Financial Times,
August 28, 2007). Today the Chinese stock market (including Hong Kong)
is bigger than Japan (FT August 29, 2007). China’s capital markets
are moving toward integration with the world market and its multinationals
and investors are prepared to challenge US-EU domination in the commodities
sector. Over the next decades Chinese companies will compete with Boeing
and Airbus in the production of commercial aircraft. Despite the protectionist
bombast emanating from the leading Democratic Presidential candidates,
Chinese imports grew from $512 billion dollars in 2004 to $792 billion
dollars in 2006 and will reach $1 trillion dollars by 2007/2008. China
is second only to the US in investments in technology, allocating $134
billion dollars in 2006. As a percentage of GDP (4.9%) China leads the
US several times over.
Clearly China’s macro-economic
successes and its ability to reduce the gap separating it from the older
imperial powers like the US and European Union, has aroused hostility,
anxiety and efforts to undermine its competitive advantages. By raising
complaints which apply equally or more to the West and Japan, concerning
the environment, product safety and trade union rights (over 91% of
US private sector workers are non-unionized and most public-sector workers
have highly restricted or no right to strike), both the US and EU are
attempting to block China’s emergence as a world economic power.
China’s sustained growth, despite stiff competition from low wage
areas and high tech countries, political pressure from the outside and
social tensions on the inside, has raised issues which thus far have
not been addressed by its outside critics (predicting unsustainable
catastrophic consequences) and internal celebrants of the current economic
model.
The new challenges are precisely
due to the economic successes of the regime as it climbs up the economic
ladder from labor intensive, low value-added production to high tech,
skilled and semi-skilled production and services. As China moves from
assembly plants and high dependence on industrial inputs to fully integrated
manufacturing based on endogenous technology, its unskilled, migrant
surplus work force becomes redundant at the same time that the scarcity
of skilled workers increases their bargaining power.
As China diversifies its
trade, it becomes less dependent (and vulnerable) on the US and more
integrated into the Russian-Asian-African-Latin American-Middle Eastern
economies. As China’s financial sector expands domestically and
globally and it shifts from being a capital importing to a capital exporting
country, it faces new challenges and risks. Volatile stock markets,
high-risk overseas investments can lead to big gains or steep losses,
which can have serious consequences on China’s ‘real economy’.
These risks grow as the Chinese government’s liberalization program
accelerates and embraces all sectors of the economy.
China’s financial
Liberalization and US Foreign Economic Strategy
There is no question that
the impetus for China’s liberalization policies from the late
1970’s to the present are a product of internal political decisions
taken at the highest spheres of the government. Nevertheless, outside
forces, principally the US government, have exerted pressure on China’s
economic polity especially since the 1980’s. US policy has pushed,
pressured, threatened, cajoled and secured incremental but cumulative
changes in China’s economic policies and structures over the last
quarter century.
To summarize US policy goals
and relative successes and failures:
1.Opening China to large-scale,
long-term foreign investments and majority ownership.
2.Large-scale comprehensive
lowering of trade barriers.
3.Patent and licensing agreements
and defense of ‘intellectual’ property rights and their
enforcement.
4.Restrictions on Chinese
investments in specific lucrative US economic sectors.
5.Labor legislation to increase
wages and the costs of production.
6.Efforts to restrict China’s
economic expansion in Africa (Sudan), Southwest Asia (Iran), Middle
East (Gulf States) by selectively raising human rights issues.
7.Sustained massive pressure
to lower barriers to the US penetration of China’s financial markets,
banks, savings, loans and investment houses.
US financial entry and expansion
is the long-term and strategic goal of Washington’s foreign economic
policy to China. In fact most of the other US complaints and demands
on China can be seen as bargaining chips in securing a decisive opening
of China’s financial sector. Summarizing US imperial financial
strategy, the first step is to secure China’s acquiescence in
an ‘opening’ for financial groups to buy shares and secure
a ‘beach head’ in each sub-sector: banks, financial houses
and investor consultancies among others. This would be accompanied by
further ‘liberalization’ of offshore investments as well
as ‘in shore’ investments (buy-outs) by big US private equity
funds. The third step would involve US financial giants exploiting their
access to hundreds of billions of local savings (public and private)
to invest in local manufacturing, commercial, technological and financial
enterprises – leading to control over China’s strategic
economic sectors. Finally having secured financial leverage over the
economy through buy-outs and mergers and acquisitions to exert direct
pressure on the political regime to serve US imperial interests.
The financial sector is the
dominant economic sector in the US economy and the most politically
influential. It is no surprise that the former CEO of Goldman Sachs,
US Treasury Secretary Paulson, serves as the point man and the leading
economic strategist of the US Empire in the Far East. Paulson’s
tactic is to raise the protectionist demands of US manufacturers and
demagogic politicians as a bargaining tool to secure Chinese concessions
with regard to ‘opening up’ its financial and banking sectors
to US penetration and eventual control. Today leading members of financial,
banking and related ‘services’ have replaced manufacturers
as the dominant group in the US ruling class. Paulson’s entire
career is linked to Wall Street – and he has demonstrated his
loyalties (and self-interest) by pursuing greater liberalization of
China’s financial markets both as a CEO for Goldman Sachs and
as the economic czar of US economic policy. Wall Street and the US imperial
policy-makers all agree that the strategic goal is to liberalize China’s
financial sector in order to gain access and eventual control over China’s
foreign reserves, savings and investment capital via a direct institutional
presence in China and via indirect influence by managing funds held
by Chinese overseas investment agencies.
China’s Liberalization
of Financial Markets
China’s economic policy
makers have taken numerous gradual small steps toward opening its financial
markets to US and foreign capital. The liberalization of the financial
sector has been fraught with debate and opposition, but over time and
more recently, the ideologues of liberalization have been gaining ground.
The progress in liberalization has been incremental but accelerating
despite the high risks involved. The highly negative results of financial
liberalization evidenced by the Japanese crisis of the 1990’s,
the huge Asian crisis of 1997 and the open-ended US-EU crisis which
began in July 2007 has failed to deter Chinese liberalizers who believe
that China is immune to crises. China was not affected by the previous
financial crises precisely because of capital controls, limits on foreign
financial ownership and prohibitions on hot (speculative) funds. Despite
the salutary effects of state-regulated financial controls, the Chinese
liberalizing elites promote financial liberalization by arguing that:
1)Foreign bank entry will increase financial efficiency, lessen corruption,
integrate China into international financial networks and, in general,
upgrade China’s financial practices and organization.
2)Foreign ownership of Banks
will be in partnership and under supervision of the state and thus will
have to comply with Chinese laws and serve the national interest.
3)Investing Chinese foreign
reserves overseas in private equity will earn more for the Chinese state
than by holding US Treasury bonds. In any case ‘only’ $200
billion of the $1.3 trillion dollars in savings is allocated for equity
investment.
4)By investing overseas China
can secure its supply chain of vital energy, raw materials and food
stuffs as well as reducing its trade surplus and negative political
pressure from the US and EU.
5)By opening up the financial
sector China can secure the support of Wall Street and the City of London
against the protectionists, especially in the US, pitting Paulson and
Bernake (Central Bank Head) against Senators Clinton and Schumer and
other Democratic Presidential demagogues.
These arguments in favor
of liberalization of the financial sector have deeply influenced Chinese
policy-makers. China has increased foreign access to China’s booming
stock market. In May 2007 Beijing agreed to allow new securities joint
ventures and increased the range of activities these firms can participate
in (Financial Times, May 25, 2007). Foreign banks are now allowed to
issue credit and debit cards. Foreign financiers are now allowed to
invest up to $30 billion dollars in domestic financial markets, triple
its previous ceiling. For now China is resisting US pressure to lift
ownership caps on foreign investment in domestic banks and to permit
foreign companies to buy into domestic brokerages. However given the
growing US and EU presence, experts expect China’s liberals to
lift these restrictions in the near future.
China has given the green
light to worldwide expansion, mergers and acquisitions and investments
in minority shares of foreign equity companies (FT, May 31, 2007). China
has recently opened its corporate bond market by eliminating quotas,
and allowing bond prices and interest rates to be set by the market
(FT, June 15, 2007). In 2006 the Chinese investment banking sector was
opened to Morgan Stanley, Goldman Sachs and UBS they have benefited
from a 10 fold increase in the stock market in 2007 (FT, June 6, 2007).
China’s promotion of
private equity investments has led to a doubling of investments in mainland
companies to $7.3 billion dollars in 2006, over 2005. However the private
equity investment sector has been dominated by giant US-owned funds,
such as the Carlyle Group and Texas Pacific Group. In June 2007, Beijing
opened the door to foreign buy-outs (FT, June 7, 2007).
China’s banks have
pushed into wealth management, attracting more high net worth clients
– while ignoring micro credit, low-income farmers and small producers.
China has virtually lifted
all restrictions on foreign investment in Chinese private companies—leading
to foreign penetration of several key sectors. During the first 5 months
of 2007 overseas banks profits grew by an annualized 43% -- $400 million
dollars (FT, July 7, 2007).
The opening to private equity
firms in China has been subject to continuing restraints – limiting
purchases to minority shares. The US Carlyle Group has established an
$800 million dollar toehold in financial services, media and manufacturing.
Once established as minority shareholders, the big Western financial
houses can move toward greater controls. Some equity funds and bankers
have taken majority shares in small provincial banks – avoiding
the political opposition, which results in attempts to grab majority
shares in larger coastal banks. The key tactic is to establish firm
economic and political links and leverage initial ties into wider spaces
and larger profits over time (August 27, 2007). The key concern of the
entire Anglo-American financial elite is to secure a clear path to capturing
savings from retail banking customers. Barclay Bank has taken another
route to entry into the Chinese financial market by selling 3.1% stock
to the China Development Bank. Barclays now has an influential Chinese
financial partner to facilitate buyouts in the China market.
China’s liberalization
is leading to the export of capital via three state channels, which
have loosened overseas investment restrictions. Starting with $90 billion
dollars in one agency and $200 billion in another, Chinese capital provides
an extremely lucrative field for international advisers to ‘create’
investment products to attract the nearly $300 billion dollars coming
into the global market. The US and Europeans have already indicated
they will block Chinese investment in what they will choose to describe
as ‘strategic sectors’, as occurred in 2006 when Washington
vetoed China’s purchase of UNOCAL Oil Company.
Western and Japanese finance
capital enter China’s market via a two-step liberalization process.
First the state privatizes energy, telecoms, manufacturing, and banking
sectors. Under the new liberalization process, this is followed by initial
private offerings (IPOs), where stocks are sold to investors, via listings
in overseas stock markets. Big US banks and investment advisory groups,
like Morgan Stanley, reap hundreds of millions in fees organizing IPOs.
All the major IS investment banks including Merrill Lynch, Goldman Sachs
and others are set for lucrative fees assisting the financing needs
of China’s private sector. The rapid growth of China’s private
sector provides a major breakthrough for Western finance capital especially
investment banks. If and when the big state companies decide to list
in overseas stock markers, mega-billion fees are in the offering for
Wall Street and the City of London.
Liberalization: The
Risks
The financial opening in
China increases its risks to international financial and market volatility:
the risks of investor contagion resulting from sudden downturns in overseas
markets will affect Chinese overseas listings. Within China, liberalization
has led to a growing speculative bubble as stocks have gone up nearly
200% over two years, without any commensurate growth in the earning
power of the firms targeted. The stock price/earnings ratio is four
times what is considered reasonable. Sooner rather than later the bubble
will burst and scores of millions of retail investors will lose their
savings and likely express their losses via public protest.
The incremental quantitative
openings to foreign financial investors can lead to cumulative qualitative
changes over time. There is a high probability that loosening quotas
on foreign investments will lead to greater leverage for foreign capital
to move through local Chinese proxies or ‘straw men’ toward
dominant positions. While that is in not the picture today, it could
easily become so if current liberalization policies deepen and extend
over sectors with time. The fact is that foreign finance capital has
the funds, organizational power and market command to out-compete local
Chinese banks and bankers in any ‘open market’.
Similar serious risks exist
with regard to Chinese overseas investments: Decisions by US and British
investment banks and advisory units, apart from receiving lucrative
fees, have already cost China’s Investment Corporation (CCIA)
a $400 million investment loss in one month in one of its earliest overseas
ventures: Blackstone’s IPO attracted $3 billion from CIC at $31
dollars a share. Its top CEOs Steve Schwartzmann and Peter Peterson
cashed in their stocks capping over a half billion in profits. With
the insiders’ sell-off, Blackstone’s stock dropped to less
than $25 dollars a share ($23 by the end of August 2007) and the Chinese
state lost in a very big way from what was deemed a legal but questionable
operation by Blackstone’s top leadership. China’s short
career in foreign equity ownership has resulted in a 22% loss. This
CIC exercise in high-risk/ big loss investing at the hands of US financial
moguls is only the tip of the iceberg. The entire liberalization process
both with regard to inflows and outflows of capital puts in jeopardy
the entire edifice of China’s industrial growth. As Chinese finance
capital speculates on funds from China’s export surplus and buys
into risky financial instruments, millions face greater economic insecurity.
Meanwhile hundreds of millions excluded from the inner financial circles
continue to suffer the consequences of low-wages and the high cost of
privatized education and health care. While middle and upper class Chinese
can afford the luxury of winning or losing their discretionary earning
on the stock market or converting their savings to offshore accounts,
most Chinese workers and peasants – the backbone of China’s
high growth –suffer the consequences of high volatility from the
irrational behavior of the market gamblers.
Alternatives to Greater
Liberalization
Liberalization of China’s
financial sector is the strategic goal of US economic Czar, Hank Paulson.
As the Financial Times emphasized, “The prize of access to the
world’s fastest growing economy for US financial service groups
has been one of the US Treasury Secretary’s most visible single
pursuits, sparking criticism that he was beholden to the industry’s
ambition to reach China’s 1.3 billion consumers.” (FT, April
24, 2007) Leading US financial analysts agree. Robert Nichols of the
Financial Services Forum underlined this point: “Secretary Paulson
has put financial services on the agenda in our economic relations with
China in a big way.” (Ibid) As we have mentioned in our text,
Paulson has successfully pushed liberalization on a number of fronts:
China has removed constraints on new foreign companies investing in
brokerages and raised the quota for what foreign investors can invest
directly in the Renminbi-denominated domestic market from $10 billion
dollars to $30 billion dollars.
China has facilitated the
licensing for foreign insurance companies – opening up a multi-billion
personal insurance market to big western insurers. Beijing has also
allowed foreign securities firms to expand operations to include property
trading and fund management (FT April 24, 2007). China has opened the
multi-billion dollar credit card sector to foreign banking by allowing
foreign invested banks to open their own brand of Renminbi-denominated
credit and debit cards.
As financial liberalization
moves Wall Street and the City of London closer to achieving their ‘prize’
– massive entry and control of China’s financial markets
– the Chinese financial sector runs a multiplicity of growing
risks. The risks from deepening liberalization include: loss of control
of economic policy via the growth of foreign control over financial
levers; risks from making overseas investments based on inexperience,
lack of information and collusion between investment advisory agencies
and corporate enterprises.
China’s risks of big
losses by investing overseas in ‘highly rated’ securities,
bonds and stocks is illustrated in the current world financial crisis
ignited by the sale of ‘sub-prime’ mortgages and now extending
throughout the prime mortgage and other securities markets.
The general truism that political
power follows economic penetration is applicable to China. As the US
and European financial sector enters in ‘partnership’ with
Chinese banks, they will likely use their leverage over their counterparts
to co-opt, bribe and pressure local and state officials to further liberalize
and extend foreign access to Chinese stocks, bonds, securities, savings
and eventually full ownership of strategic financial sectors.
In contrast to the high risks
of losing political and economic control and investment losses –
evidenced by the $400 million dollar loss in the CIC investment in Blackstone
- China has sound, low-risk investment opportunities in the domestic
economy which will enhance long-term, large-scale growth.
China each year suffers serious
economic losses due to the dismantling of its public health system.
One of the biggest casualties of the transition to capitalism has been
the privatization of health care and the loss of all medical coverage
of China’s hundreds of millions of poorest peasants and rural
migrants. (Financial Times, August 30, 2007). A fifty billion dollar
investment in free rural public health program, staffed by professional
doctors and nurses, low-cost drugs and basic medical technology would
increase productivity and consumer spending (currently saved for medical
emergencies), reduce troublesome trade surpluses by increasing imports
and increase living standards. (OECD China 2005, page 12). This would
also lead to a decrease in female infanticide, because the insecurity
of access to medical care after retirement is one of the main reasons
rural families prefer to have only sons.
China’s primary and
secondary school system has been privatized – as local and state
governments have introduced fees. The result is a growing dropout rate
among tens of millions of poor Chinese children. “Over the last
five years, the number of Chinese who cannot read and write grew by
30 million to 116 million, wiping out years of gain,” (China Daily,
April 2, 2007). China’s move from a low skill, labor intensive
economy to a more advanced technological society will be hampered by
lack of basic educational skills. Public investment of at least $20
billion (from the $200 billion investment funds) is low risk, highly
productive and employment generating. Investment in universal free public
education will employ millions of teachers, principals, school workers
and construction workers in building and maintaining schools and related
facilities, expand the domestic demand for manufacture of books, computers
and school materials.
Every major environmentalist
group, national and international political leaders, tens of millions
of Chinese workers and residents have pointed to the high cost of pollution
both in terms of unhealthy population, loss of productivity and losses
of cultivated land, drinkable water and safe air. China could invest
$100 billion dollars in alternative energy usages, energy efficient
buildings and the regulation and closure of industrial and chemical
polluters. According to the World Health Organization, 705,000 people
die prematurely every year in China because of filthy air and water
(World Book Report March 2007, quoted in Financial Times July 3, 2007).
For every early death, we can assume at least several hundreds of thousands
who are temporarily or partially incapacitated by pollutants. While
top leaders have urged local officials to act and even established environmental
criteria in their performance evaluations, pollution continues to grow.
China’s decentralized political structure allows local official
to violate national directives and encourages them to continue to promote
local polluters. Only national directives and funding administered by
local democratically elected environmental committees, which include
independent consumer and environment specialists with police powers,
can break the power of the alliance of local/state officials with the
public/private polluters.
China’s dependence
on foreign markets and offshore investments is a result of the weakness
of the domestic market, largely the product of the low salaries, wages
and dismal consumer power of workers and peasants. The weakness of the
domestic market for mass produced goods is the result of the great concentration
of wealth and income in the upper 10% of the population, China has (with
Nepal) the worst inequalities of any Asian country. Inequalities in
China are greater than Japan and 50% greater than in Taiwan or South
Korea (FT August 9, 2007). Enforcing minimum wage, limiting working
hours and occupational safely legislation will increase the purchasing
power and available shopping time for hundreds of millions of consumers
who are marginalized from the domestic economy. China will become less
dependent on exports, social unrest will decline and potential political
upheavals will decrease. Investing in raising income will reduce profits,
conspicuous consumption by the economic elite and stock market speculation.
Wage increases will also reduce the trade surplus and the search for
risky overseas investments.
China is at the turning point:
Continued liberalization leads to high risk overseas investments, loss
of domestic market control, greater inequalities and pollution, leading
to greater political and social unrest.
Political and social reforms
re-orienting investments to the domestic market and rebuilding the entire
public educational and health system is central to ‘constructing
socialism with Chinese characters.” Intervening through locally
elected community based environmental assemblies to liquidate polluters
is necessary to modernizing China and preparing it for a more advanced
economy.
Raising income and corporate
taxes on the emerging foreign and domestic corporate elite is necessary
to lessening inequalities and controlling luxury imports. Lessening
the power of the state and private ruling class avoids high-risk foreign
takeovers of strategic economic sectors via ‘joint ventures’.
China’s giant economic
leap forward via public-private investments has opened a vast, far-reaching
internal debate over its future direction: The choice is between accelerated
liberalization and open doors for foreign financial capital, as US Treasury
Secretary Paulson argues, or profound rectification and re-orientation
toward low-risk, large-scale investment in the domestic market, as many
Chinese workers demand. Will China follow a path of neo-liberal reform
with Western characters or a socialist model with Chinese characters?
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