Huge contradictions behind China’s stimulus-driven recovery

Published on WSWS, by John Chan, November 19, 2009.

… While still strong compared to most other countries, China’s slowing growth points to the limits of the government’s 4 trillion yuan ($US586 billion) stimulus package and loose lending policy since last November. Industrial production rose by 16.1 percent in October year-on-year, the fastest pace since March 2008, but exports continued to slide by 13.8 percent.

Even before the global financial crisis, there were huge overcapacities in industry resulting in low profitability. As a result, the flood of state bank credit unleashed last year has not gone into productive investment, but has fuelled rampant and unsustainable speculation in the stock and real estate markets. New bank loans in the first 10 months of 2009 reached $1.3 trillion—a surge of 144 percent over the same period last year. Property sales jumped by 82 percent in October year-on-year.

The Financial Times warned recently that China was heading for a “Japan-style bubble” like that of the late 1980s, which burst with a spectacular collapse of Japanese share and property values, leading to prolonged economic stagnation …

… China’s rapid economic growth over the past decade was dependent on rising consumption in the US and Europe, which has now been limited by falling real wages and high household debt. Workers in China did not benefit from China’s huge export earnings and high corporate savings, which were channelled back into the US to keep the yuan’s exchange rate low and Chinese goods relatively competitive. As a result, the US was able to finance its rising deficits and keep interest rates low, which in turn underpinned the rampant speculation on Wall Street.

These interconnected processes were shattered by the 2008 global crisis. Far from reversing the previous imbalances, Beijing’s stimulus package has propped up major corporations with export subsidies and incentives for car sales, and above all, through infrastructure projects for steel and cement industries. Only 20 percent of the package was allocated to social programs that would boost domestic spending. Most new bank loans were not taken by small and medium enterprises that employ the bulk of workers, but by large state, private and foreign corporations with close connections to the regime. As a result, 90 percent of the GDP growth in the first seven months of this year was driven by fixed asset investment, compounding existing overcapacity.

Social inequality is deepening. The stimulus package helped to expand the list of Chinese dollar billionaires from 101 last year to 130 this year. At the same time, the Chinese Academy of Social Sciences estimated in September that 41 million Chinese workers had lost their jobs, mostly in the export sector, since the beginning of the financial crisis, or 40 percent of the world’s total job losses.

As the impact of the stimulus package starts to wane, China confronts the prospect of falling growth rates and the danger of financial turmoil as well as rising social tensions and instability. (full text).

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