Recession creates trouble for China

by Charlie Hore

Events in the Chinese economy and decisions by the Chinese government will have major consequences for how the global recession develops.

As well as having become a major industrial power, China is also a leading investor in those parts of the money markets hit worst by the credit crunch.

China’s recent economic boom has left the Chinese government awash with money, much of which has been invested in US institutions.

For example, China is the largest foreign investor in Fannie Mae and Freddie Mac, the mortgage companies recently bailed out by the US government.

In fact the bailout was largely necessary to prevent the Chinese government withdrawing even more of its money, which would have led other foreign investors to pull out.

China’s wealth gives it great clout in the US market – and this scares some rightwingers who fear the US is losing power to China.

But the reality is more complex. China needs to prop up the US economy because its collapse would threaten Chinese prosperity.

This is for two reasons. First, the Chinese government is sitting on a US dollar mountain, and if the dollar loses value so do they.

Second, China’s financial wealth simply cannot be deployed anywhere else. No other market has the investment opportunities.

Of course the Chinese investment companies aren’t simply going to give the US economy a blank cheque. They refused to buy the investment bank Morgan Stanley for instance, assessing it as worthless.

And the Chinese government will seek to extract political gains in return for its support. But the Chinese and US economies are too tightly entwined for China not to become involved in the rescue of the US.

Manufacturing

Similar considerations apply to the Chinese economy. The recent manufacturing boom has been built on high levels of state investment and exports to the West. The growing global recession threatens both.

The government wants to cut economic growth to reduce inflation, but it is very unlikely that it will be able to control this process.

And even a small dent in China’s growth will have major consequences for both the world economy and for Chinese workers and peasants.

China has become a major importer of raw materials and components. Earlier this year mining company shares lost half their value simply over fears that China would slow down.

Now those fears are real. China’s steelmakers plan to cut production by 20 percent while some shipyards face closure.

Such cutbacks will have a major effect on those countries that have become increasingly dependent on exporting to China – Australia, Japan and Taiwan in particular.

But the wider knock-on effects will be felt across much of southeast Asia, Africa and Latin America.

The decline in imports of particular products could be extremely fast because of the fragile nature of much of China’s consumer export industry.

There are tens of thousands of small companies engaged in cut-throat competition for markets, and thus operating on tiny profit margins.

Collapse

Even in good years hundreds of them fail. If demand from the West dries up, they could collapse very quickly.

It’s too soon to know how bad their decline will be, but there are several straws in the wind. In one town in Zhejiang province, one in five textile companies have gone bust.

Official reports suggest that half of all toymaking companies have shut in the last 12 months. And in the last year one third of all China’s shoe factories have closed.

According to one report, some 20 million workers have lost their jobs, although the government denies this.

Whatever the real figure, the impact of unemployment will be massive. Most exporting industries employ migrant workers who have no employment rights, and will get no redundancy money. They will be expected simply to go back to their villages.

Between 1998 and 2002 there were near-insurrectionary protests in state-owned industries that were shut down, not against the closures as such, but for benefits that workers had been promised.

The Chinese government will be very lucky to avoid similar outbreaks.