CHINA - Chinese Crackers - Update 2012-13


 ‘All governments are run by liars and nothing they say should be believed’.

My scepticism about the Chinese economy grew from the working principle of US investigative journalist, the late I.F. (Izzy) Stone. The catalyst for my becoming a China sceptic was a 2003 article titled ‘Gold into Base Metals’ in one of the most prestigious publications in bourgeois economics, the Journal of Political Economy. Its author, Alwyn Young, had tracked the numbers up from village level to the national figures between 1978 and 1998, to document their unreliability, thereby turning ‘the extraordinary into the mundane’.

In December last, Paul Krugmann, recipient of a fake Nobel Prize in self-styled Economic Science, summed up the latest scholarly consensus that Chinese stats are a more-than-usually ‘boring form of science fiction’. (Australian Financial Review, 20 December 2011, p. 20)

The unreliability of Chinese reporting has pertinence for evaluating the chances of a general and deep crisis there. The cheery optimists agree that all the numbers are phony but that since they are all fake in the same way they give an accurate picture of trends.

The dubious nature of the numbers is compounded by the failure to collate some of the most crucial sets. The Ministry of Housing and Rural-Urban Development hopes to integrate housing data from forty key cities by July. That leaves 617 cities outside the system. The lack of nation-wide figures in the housing construction makes it hard for the State Council to enforce controls and for anyone to assess the size of the bubble.

This time last year, Surplus Value published a first update of my 20,000-word investigation into the weaknesses in the Chinese economy that had been posted on early in March 2011. An acquaintance in the Department of Foreign Affairs and Trade thought that any bureaucrat who raised those concerns would be retired as mentally incompetent. What a difference a year makes. ‘Conventional wisdom’ is now dividing between those who predict either a soft or a hard landing.


Space does not allow us to pursue all the issues raised in the original survey. Hence, we shall focus on that pivotal element in every kind of capitalism - the banking sector. Here I draw on the review by Hung Ho-Fung of Carl Walter and Fraser Howie Red Capitalism The Fragile Financial Foundation of China’s Extraordinary Rise on The authors are veteran investment bankers with Morgan Stanley and J P Morgan with years of experience in China helping to float major State Owned Enterprises (SOEs) in overseas stock markets; both are fluent in Mandarin.

To appreciate the expanse and depth of the problems means starting from the 1997-8 Asian crisis which led to the creation in 1999 of ‘bad banks’ known as Asset Management Companies (AMCs) which took in the problems from the four big state banks which then became ‘good banks’. The AMCs were never adequately capitalised. The Ministry of Finance put in RMB40bn but the other RMB858bn came in the form of 10-year bonds. This was just creative accounting. Debts were now called bonds. The crisis had been postponed for ten years.

By 2006, the AMCs had recovered about 20 percent of the non-performing loans, enough to pay the interest on the 10-year bonds falling due in 2009. That expiry date was in the depth of the so-called Global Financial Crisis. It became obvious that the AMCs would not be able to repay their maturing bonds, which constituted up to half the capital of the Big Four ‘good’ banks. As a remedy, the government extended the AMC bonds for another ten years. This is no more than a postponement of the crisis. Indeed by 2019 China’s financial system will be far more vulnerable: many of the massive loans from the emergency ‘Great Leap Forward Lending’ in response to the continuing crisis will deteriorate into a new wave of non-performing loans, much larger than that of the 1990s. Walter and Howie conclude that a domestic banking crisis is only a matter of time.

 Shadow banking

To reduce inflation and control the property bubble, the State Council pushed up the reserve requirements of the banks. That limitation made it harder for small and medium enterprises to get loans. One response has been the growth of ‘shadow banking’ with loans from individuals, small ??? . In addition, state-owned enterprises and banks have set up financial arms to lend outside the new rules. By June 2011, these loans stood at 20 percent of formal financial lending.

In terms of government policy, this evasion of liquidity limits is compounded because 60 percent of the shadow banking goes to real estate, fueling the property bubble. The risk is similar to that from sub-prime loans in the United States. When the real estate prices fall, the marginal developers will be forced to sell off at bargain prices if only to deal with interest rates of up to 60 percent per annum. Once that spreads, a domino effect could run up to the big banks which have loans collatoralised by property. The disappearance of company executives from Wenzhou is a harbinger of this danger. (Asiamoney, November 2011)

Just how difficult it is to keep track of real-estate loans is exemplified by an even shadier form of lending. Non-precious metals such as aluminum and even copper are used as collateral to raise funds for building projects. check in

Chinese brass

The great disorder under heaven from the boom set off by the 2009 stimulus package required Beijing in June 2011 to buy up $US463 billion in bad debts to banks from local governments. That bailout was half as big again proportionately as the 2008 one in the US. In addition, Moody’s estimated that local governments still had undisclosed debts of $540bn that the central authorities considered not to be real claims because they were ‘poorly documented’.[1]

At the same time, the State Council tried to control inflation and the property bubble by driving the reserve requirements on banks over 22 percent before the end of 2010-11 financial year. Not surprisingly, bank lending shrank by 12 percent year on year to mid-2011 while the money supply (M2) grew by only 15 percent.[2] Nonetheless, investment in the property sector increased by 35 percent.[3] How did developers squeeze so much more money-capital out of somewhat less? One answer is that they used copper, aluminum and even steel as if they were gold bars in Fort Knox. Financiers found a way around the controls on liquidity, as is their wont, until

inventory financing has become so common that one Standard Chartered report suggested that copper could be rebranded as a form of collateral for loans rather than a commodity. Borrowing copper and converting it into cash can be cheaper than traditional borrowing.

It seems Chinese importers are paying the terms of letters of credit. They can buy, for example, a tonne of copper at $10,000, obtain a letter of credit from a bank by paying 20 percent, sell the copper – either domestically or by re-reporting it – and invest in high-yield assets, such as the property market, then pay off the letter of credit when the term is up, typically after 90 or 180 days.[4] (The Banker, June 2011, p. 47)

This method of securing funds poses hard questions about which of the forms taken by the capital during this metamorphosing are fictitious and which real. A store of copper is not real just because it is in metal bars, yet becomes real when it funds construction from which surplus value will be extracted. However, at least some of the valuation that the owners will put on those blocks of units and offices will prove fictitious until they can be rented at returns that bring an average rate of profit, which is not easy in the current over-supply.

 In struggling to make sense of reports about China we must cling to Izzy Stone’s unconventional wisdom about habitual liars. At the same time, we should never forget that when John Kenneth Galbraith coined the phrase ‘conventional wisdom’ he was referring to ‘the beliefs that are at any time assiduously, solemnly and mindlessly traded between the conventionally wise’ – professors, fund managers and their stenographers in the media.

Trade surplus up because of falling imports

Not buoyant exports. Some of that shift is at the cost of Australian exports

Iron ore prices fell from $170 a ton to $140 and are headed south.

 The weak spot in the financial structure is that the Party ‘can tell the banks to loan to the SOEs, but it seems unable to tell the SOEs to repay the loans’.


3CR Solidarity Breakfast notes  13 March 2013

 This week we must get back to the north Asian ascendency, as Garnaut called it over twenty years ago. Now we have the Asian century.

Back to the old tale of why China won’t save us.

They wont save us even if they each bought a pair of woolen socks and put two lumps into their green tea.

The focus is China but what happens there is affected by what goes on in Japan and Korea.

 Might open with a comment on the ‘news’.

Korea has come back after firing some missiles into the sea.

A few weeks back we did a program on Korea and war. At the time, nuclear war was about to break out.

Then two home-made bombs went off in Boston and Korea lost its place in the news.

One more reminder of the priorities of the ‘news’ and how little attention we should pay to ‘news’.

 That let’s us segue into the collapse of government revenues.

 I’d like to tie news about China into one aspect of the budget process.

In particular, the mismatch between Treasury forecasts and budget revenues.

 A second segue – this time from dodgy stats inside China to failed predictions here about China.

Remember when the boom was going to last until 2030?

Now it is going to be ‘over before Christmas’.

Failure of Treasury in its predictions of tax revenues. Why?

The experts are all ‘cheery optimists’.

They are not game to break from what J K Galbraith called conventional wisdoms.

Or to rephrase Orwell, some ideas are so dumb that only a committee could have them.

 Prudent for Treasury to employ three people to work on whatever view I the counter-cyclical.

Stalin joke:

A Komosol asked him whether the greater danger came from Leftwing adventurism or from rightwing opportunism.

Stalin replied: ‘whichever one we are not watching at the moment.’

That is a golden rule for politics and economics.

 Banjo Paterson on booms.

They all have one thing in common. They all go bust.

Droughts are followed by floods.   What’s the surprise.

 The ‘this time is different’ line keeps popping up whenever the stock-market is racing to the heavens.

Financial journalists are paid to massage the egos of investors and dealers.

If you point to problems you are accused of causing them.

Eg Paddy McGuinness as editor of the Fin Review in the early 1980s predicted that the Fraser-Lynch minerals and energy boom was hollow.

The warning signs about China have been around for years.

My ‘Chinese Crackers’ was posted in 2010 and updates each year since then.

 I am no expert on China.

My advantage is that I don’t read the daily papers or watch television.

 A DFAT friend told me that if any bureaucrat who put the material in my summary inside the Department would be retired as mentally incompetent.

 Now quick reminders of four points from previous programs going back to 2008, before Bill was on Solidarity Breakfast.

First, corruption is rampant. Latest example is of the top planner and the man in charge of energy policy. Liu Tienan.

Point two is that stats are science fiction.

If the top planner is corrupt how much reliance can we place on the numbers that he puts out?

Thirdly, the economy remains flat.

Last year, forward sales at the Canton Fair were down by 7 percent. This year they dropped a further 1.4%.

Fourthly, the public finances and the banking sector are bankrupt.

Three recent warnings:

> Nomura securities is warning of a bigger bust than the US in 2008

> Hong Kong professor Larry Lang of HK Chinese University says the mainland is already bankrupt

> Above all, on 18 April the deputy director-general of National Audit Office refused to sign off on financial statements from local governments.

Define local governments as more than the Yarra Council. Populations equal to Australia’s.

 Gillard deal on convertible currencies

No big deal.

First, convertibility does not apply to our dirt. Those contracts are written in US dollars.

Secondly, even if you get paid in Yuan you have to spend them inside China.

 But why are the Chinese anxious to get out of holding US money?

The panic merchants in the US claim that the Chinese share of government bonds etc is so great that Beijing will dictate policy.

The reverse is closer to the truth.

Another old story. If someone owes you trillions of dollars, that debt becomes your problem, not theirs.

China needs to cut back holdings of US bonds etc but

  1. Can’t withdraw too much at once without causing a total collapse and loosing the lot.
  2. Cant stop buying them because the inflow allows the US corporates to pay for the cheap imports.

China is caught in a vicious circle.

 Recent rise in value of US dollar.

Mixed consequences.

Good for China is that the value of their investments has stopped falling and so not so urgent to get out.

Also high dollar means the US can afford to buy more.

Bad is that one reason for a rise in the dollar is the expectation that the Federal Reserve will stop printing money.

If they do, the ‘fragile’ recovery will go back down the tubes.

Then the demand for Chinese goods will slow down too.

 Economics is a game of snakes and ladders.

 What are the dynamics?

> Japanese devaluation cuts across China’s attempt to move into higher value exports

> Impact of drop in consumer demand in the EU and in the USA.

> Impact of worker fightback inside China,  linked to

> Impact of attempt to drive up domestic demand.

The previous five -year Plan was for 50 percent of GDP in service sector by 2010 – but reached only 40%

Domestic demand has to be made effective and that means higher incomes – upwards pressure on wages.

The result is that Japanese, Korean and Taiwanese firms have flown the coop to Indonesia.

 Wind up with one statistic about Chinese ownership of Australian corporations.

In late 2010, Chinese investors held 0.2 percent of the shares here.

At the same time, the US held 29 percent.

That is, one in five hundred for the Chinese against nearly three out of every ten for the US Imperialists.

Back to the question to Stalin: which one should be watching?

3CR Notes  Solidarity Breakfast China, 6 August 6 2013 

 Back to one of our staples but one that shapes so many elements of political economy here. It is time to get back to the banks.

  Now let’s turn to the big story of the past month.

The financial crunch in China.

 News reports of a credit squeeze and then of a relaxation in limits on lending.

What is going on?

 First, we have to understand that there are now three banking structures in China.

There are the four big ‘good’ banks.

There are four big ‘bad’ banks.

And there are shadow banks.

These shadow banks are linked to the four so-called good banks.

Important to see how the bad banks and the shadow banks came into existence.

 We don’t get much help from the mass media.

Even the Financial Times regarding the past four weeks did not go back beyond the 2009 stimulus in China.

The media’s memory loss illustrates my point that the media make us ignorant.

They chase the news – disconnected data.

Something that happened in 1999 is ‘ancient history’ - or never happened.

How can something from 1999 have any effect on NOW?

This what a friend of mine calls   NOW-ism  not MAO-ism

NOW-ism blights the entire world.

 So the credit crunch broke through the media massage about China ruling the world.

But reported as if the crunch came from nowhere

Some of the specialist press mentioned the overhang of bad debt from the stimulus package of 2009.

But no mention of the 1998-9 overhang of bad debts

 Good Banks

The good banks are really the naughty banks.

They are called ‘good’ only because their balance sheets look good.

Their debts and the dodges are kept off the books.

 Bad banks

After the 1998 Asian financial crisis, the Chinese economy slumped.

One result were lots of bad debts on the four big banks.

The central government came up with a novel solution.

They would set up four new banks which took on all the debts from the four old banks.

The new banks were the bad banks.

However, these banks would be wound up in ten years time.

The good banks and the government would contribute to paying off the bad debts by 2009.

 Two points to notice.

One, very little money went into the refinancing.

Two, by 2009 the Chinese economy was again going down the tubes.

Instead of paying off the old bad debts the government did two things

One it rolled the bad debts over for a further ten years.

They are now due to be paid off in 2019.

They are still there.

Two, to rescue the economy and perhaps the political system, the Chinese launched a stimulus package that was larger than the one here or in the US in comparative terms.

 By late 2010, the new round of bad debts had erupted out of the stimulus.

 The State Council tried to rein them in.

But the provincial and local governments kept borrowing and spending.

 The projects ran up more bad debts.

 To get around the limits imposed from Beijing, the banks set up shadow banks.

Shadow banks

There had always been some backdoor financing

But became a major component after the 2009 stimulus package got out of hand

The Good banks began shifting deposits off their balance sheets

They thereby continued to lend.

Important to see that the shadow banks are not wildcards – they are not rivals to the Good banks.

They are arms of the Good banks.

 Crunch time

 Once again, Beijing imposed a ratio of Loans to deposits of 75%

The banks stopped lending to each other

That was what was happening when Lehman Brothers went down in 2008

Once that happens, the game is over.

So Beijing backed off.

It said it would bail out failing banks but only if they did as told.

Assistance would be available only to banks who stayed within the guidelines.

 A risky but necessary program.

The debts cannot go on piling up whether on or off the books.

But writing them off and limiting new loans might tip the whole economy into a disaster

Or at least into a deflationary cycle such as Japan has had since 1990.

 Chinese here

WA govt just signed onto a $80bn loans with the China Development Bank

 China needs to invest off shore in order not to overheat the domestic economy

 The Chinese also need to Diversify where they send their trade surplus

 They need to get out of being prisoner to US debt

Not easy to find a safe haven

Do you want to buy Euros?

 Cheery optimists

Always a solution according to the financial press. 

One clown pointed out that the Chinese banks need not go belly up because the Chinese people have lots of savings.

Indeed, they do

And a lot of those savings are under their beds.

Why are they under the bed?

Because they don’t trust the banks.

Are they likely to trust the banks more now the news is out that they are on the verge of going bust?

 The other obstacle is that the Chinese have their savings tied up in real estate. By definition, the illiquid assets can’t be turned it into cash.

If lots of people try to sell up at once the skyscraper of cards will collapse.

Instead, they sit on those dead assets.

Often the investors cannot even get a return on their property investment.

No rent comes in from a vacant tower block.

 The Chinese government also has a huge pile of savings – in the US.

Those investments are also somewhat of a liability.

Beijing can’t bring them home in a rush to shore up failing banks.

Why not?

Because that withdrawal would implode the US economy and thus puncture the global economy.

Hence, there would be no customers for Chinese exports in the USA or Europe.

And no Chinese demand for Australian dirt.

 We shall have more to say on the China threat in the weeks to come.

Off-shore islands

Land grabs etc

This morning has been a reminder that Australians have more to fear from the weaknesses in China than from its strength.

3CR Solidarity Breakfast,  Saturday, 20 July 2013

 In Fear of china

 In the 1960s into the early 1970s, Australians lived in fear of China


Lead up to Vietnam – a thrust by China, lied Menzies

 But Now?

Need for an enemy to boost military spending.

 We have spent time looking at the weaknesses in the Chinese economy.

New evidence of that is coming out everyday.

But this time I want to focus on the disputes over islands.

We shall get to the detail presently.

First, we need to put the oceans into their global political-strategic context.

In particular, we need to rethink decolonization.

We need to do this rethinking in two ways.

First, is this really a post-colonial world?

Secondly, we have to raise a question that is almost never mentioned – namely, the de-colonisation of the oceans.

 Those two questions provide the context we need to understand the conflict over the islands off the coast of China.

 First: is this the era of Post-Colonialism?

The answer is a resounding NO

So what do we have?

The answer remains Neo-Colonialism 

That is the term popularised in the early 1960s by Nasser and Sukarno.

They defined Neo-Colonialism as Constitutional independence but economic, strategic and cultural subordination.

Anyone who thinks that we moved to a Post-Colonial world in the 1960s is ignorant of history, politics, strategy and economics.

Who fits that bill?

Prime suspects are the self-styled Post-Modernists,

Most of whom never understood what Modernism was.

They fell out of literature and visual arts departments.

They operate in a realm of disembodied ideas.

They live in a world where the mundanities of getting and spending play no part.

One of their claims is that the grand narratives of socialism are dead.

Perhaps so,

But the grand narrative of the expansion of capital staggers on.

 So does the struggle to decolonize–

Advances made in Latin America

 But the monopolising capitalists are always pushing back.

We see that across the Middle East

 One way to think about the conflicts between China and the US imperialists is that the latter are out to re-colonise China.

To revert to slicing up the Chinese melon.

 Now to move seamlessly into our major subject – the islands and the seas.

What we find here is that the legacies of Eighteenth and Nineteenth-century colonisation are alive and well.

 Secondly: De-colonialising the oceans

 Australians think of our country in terms of its land mass

As the biggest island continent

Contrast with states made up of thousands of islands – eg  Indonesia

Therefore, archipelagic statehood very important for Indonesia and the Philippines

And thus very significant for Australian trade

But also crucial trade for Japan and all of North Asia.  

 Do the waterways divide or unite Indonesia ?

Quicker to go by water than across land

They are not keen on warships sailing through the narrow straits

 Go back to three-mile limit from the 1600s – which was as far as cannon ball could fly.

Then extended to twelve miles

Throughout the 1970s, negotiators for a Law of the Sea Treaty came up with idea of a 200km Exclusive Economic Zone.

1982 agreed on UN Convention on Law of the Sea   UNCLOS

161 signatures

but not the USA

nonetheless, the Reagan admin announced that it was assuming control of the off-shore islands as if it had signed.

The US thereby got 9.5 million square kilometers of exploitation rights.

That is in addition to the 2.5 Million EEZ from the continental USA

 Australians sometimes pay attention to the Exclusive Economic Zone of 200 km offshore

That is at the heart of the battle with Timor Leste over oil and gas in the Timor sea.

That is too complicated to go into this morning but typical of the disputes that arise when two EEZs collide.

But the EEZ is itself a recent concept – barely forty years old

 Offshore islands

Giving numbers over the radio is never a good idea

So we need to go slowly and carefully

 Compare how much is held by the old empires

Britain and the Falklands/Malvinas for example,  3.6m square kms in the South Atlantic

No wonder Thatcher went to war

 Begin with the biggest picture

 If China gained all the disputed islands its offshore EEZ would be 2 million square kilometers

 The six biggest holders of offshore EEZs have undisputed claims to 39 m sq km

In effect, twenty times more than China is claiming

And 40 times more than China’s coastal EEZ

 France alone has 9,5 million

 The USA has 12 million, or six times much as China claims.

 Australia has 2.6 million from our island possessions.

 Why are China’s claims plastered all over the media when no attention is paid to the colonial hangovers?

 The fact that China has made claims is no different from the claims made by the Japanese, the Koreas, Vietnam and the Philippines.

 Yet the Chinese claims are blown up into the threat of a new Peloponnesian War.

Around 1960, the US and Formosa were threatening war with the mainland over two offshore islands - Quemoy and Matsu

Who remembers them now?

Where have they ended up?  I shall find out and let you know on Saturday.


BEIJING BANK-RUPTS:  Bad banks create Good banks

 China cascade

 Peter Nolan and Jin Zhang ‘Global Competition after the Financial Crisis’, New Left Review, 64, July-August 2010, pp. 97-108.

 This recent article merits study and discussion. It is a corrective to the chorus about an unstoppable Chinese national-market-state displacing the US or European one to become the next global imperium. The authors distinguish between size and flows. While the Chinese capitalists are doing well on size they are locked out of the flows.

The article begins by noting that China’s exports did indeed overtake Germany’s in 2009 to become the world leader. The authors then explain why ‘Chinese companies face enormous competitive challenges in operating on the international stage’. The crucial problem is that China’s manufacturing and banking are not integrated into the global networks. Instead, ‘They have to compete with the powerful firms that now dominate almost every segment of global supply chains’. China’s prospects are constrained because its businesses are not at the controls of this ‘cascade’ of flows.

Freed from the ideological blinkers of neo-Classical economic correctness, it is easy to see why ‘free trade’ opened doors to further monopolising.

Large companies from the advanced economies vastly expanded their international investment, building production networks across the globe.

Although Chinese capitals have advanced during the current crisis as their rivals slid down the ranking of global giants, US and EU firms also strengthened their position through further concentration, (oligopolising). China still has no place in nine of the ten key sectors.

China got onto the finance list in part because of the loss in the market capitalisation of financial houses, but mostly because the Chinese banks dominate their own turf. They are huge but not networked. As Nolan and Zhang put it:

It requires a huge leap to progress from being a powerful domestic bank, operating in a heavily protected home market, to one that is globally competitive and able to finalise large-scale international mergers and acquisitions.

Without the links to carry through take-overs, can Chinese capitals buy their way into the other nine sectors? Only construction equipment has a level of concentration below 50% - at 44%. The next lowest is for PCs at 55% and third is mobile handsets at 65%.

Inevitably, these oligopolies dominate R&D, and thus have their hands on the future drivers. They also dominate foreign direct investment (FDI). The combined FDI by the big four newcomers - Brazil, Russia, India and China - is less than that of the Netherlands. Two-thirds of China’s FDI goes to Hong Kong and Macao; its next biggest destinations are the Cayman and Virgin Islands, with 17% of the PRC’s total FDI.

The much vaunted $2.3 trillion of foreign-exchange reserves that China held in 2009 needs to be contrasted with the $63.7 trillion available to the top 500 asset managers in the West. Moreover, Chinese reserves amounted to only $1800 for each Chinese but $5,600 for a South Korean and $8,400 for each Japanese.

Hence, by every measure, Chinese firms are in the infancy of global corporate behaviour. The challenges are qualitative more than quantitative.

Since 1980, ‘The age of globalisation witnessed the rapid consolidation of systems-integrator firms and their supply chains’. China’s competitors retain advantages from nearly 150 years of installing management systems, domestically and around the planet. Since 1980, the non-Chinese corporations have increased and upgraded those barriers and links. Those developments were not initiated against China, but can now channel its growth away from over-taking the oligopolies based in the West.

Catching up is not just a matter of Chinese workers pushing out more and cheaper cars or tie-pins. It also involves the ‘visible hand’ of management beyond the factories, the integration of finance with supply, production and distribution. Chinese workers and executives are more than capable of performing those soft power functions. At issue is whether will they be able to buy their way through the gate of earthly profit. Or will they be checked by a new great wall – one that keeps the Chinese in, not the barbarians out?

In addition to acknowledging this obstacle, any prognosis for China needs to consider six more issues:

> distortions from the undervalued Yuan;

> a banking system carrying undisclosed loads of doubtful debt;

> a stock market corrupted by state policy (see ‘Shanghai Express’ item);

> real estate bubbles;

> massaged statistics (see ‘Chinese Crackers’ item);

> turbulent workers and unemployed.

On top of these domestic matters, Chinese growth remains vulnerable to contractions of demand for its products in the rest of the world, whether from budget cuts in the EU or recession in the US.

In pondering China’s future, we need to think beyond its 1.5bn people and the enormity of their output to recognise that Chinese capitals have to meet the same needs as capital anywhere. Its expansion requires more than the exploiting of labour – at which the Chinese firms have been successful. The surplus value that results has to become the profit for the next round of investment. In Volume II of Capital, Marx traces the cycle of Money, Production Commodities, through Production, to Commodities for expanded Money to invest. (M-C-P-C-M+) (See items in Capital Refined) Without mentioning Marx, Nolan and Zhang provide evidence for how the global concentration of capital stands in the way of Chinese firms being able to flow through these circuits.


Notes from a review by Hung Ho-Fung New Left Review (Nov-Dec 2011) 

of Carl Walter and Fraser Howie

Red Capitalism, The Fragile Financial Foundation of China’s Extraordinary Rise

 The authors are veteran investment bankers with Morgan Stanley and J P Morgan with years of experience in China helping to float major State Owned Enterprises (SOEs) in overseas stock markets; both are fluent in Mandarin. Their 2003 book was Privatising China.

 In 2004, the average profit rate for State Owned Enterprises (SOE) was 2.4 per cent compared with 6.7 for private enterprises. By 2009, the ratio had expanded to reach one to four, 2.4 per cent and 10.6.

In 2007, 20 per cent of corporate profits from stock trading.

 The weak spot in the financial structure is that the Party ‘can tell the banks not to loan to the SOEs, but it seems unable to tell the SOEs to repay the loans’.

The 1997-8 Asian crisis led to the 1999 creation of ‘bad banks’. They are officially called Asset Management Companies. They took in the problems from the four big state banks. That allowed them to become ‘good banks’. The AMCs were not properly capitalised. The Ministry of Finance put in RMB40bn. The other RMB858bn came from 10-year bonds. This arrangement was just creative accounting. The good banks still had the debts but they were now called bonds. This device postponed the crisis from non-performing loans for ten years.

            The following are extracts from the review.

Meanwhile, the SOEs became ‘cash machines’ of the oligarchic CCP families, today’s ruling elite. Heads of the largest SOEs are equal in rank to provincial governors and ministers of state; many are members or alternatives on the Party’s Central Committee. P. 141

Nor has this elite been shy about squeezing resources from these companies, which became increasingly unable or unwilling to repay their lingering loans. As of 2006, the Asset Management Companies had only been able to recover about 20 percent of the non-performing loans, and the cash thus generated could barely pay the interest on the 10-year bonds held by the major state banks. In 2009, it became clear that the Asset Management Companies would not be able to repay their maturing bonds, which constituted up to half the capital of the Big Four. As a remedy, the government extended the AMC bonds’ maturity for another ten years. This is no more than a further postponement of the crisis. Indeed by 2019 China’s financial system will be far more vulnerable: many of the massive loans from the emergency ‘Great Leap Forward Lending’ in response to the 2008 global financial crisis will deteriorate into a new wave of non-performing loans, much larger than that of the 1990s. 141

 To the extent that a market for bonds exists, it functions as a clearing house to move money from the one arm of the state to another, resembling a pyramid scheme with household savers at its base.  142

The 2009 stimulus package required municipalities to come up with two-thirds of project spending, so they leveraged utilities, infrastructure and assets to borrow from banks and then issue bonds. 142

With declining saving deposits as buffers, the coming of a homegrown financial crisis is just a matter of time.  142

 Public debt

The figure at the end of 2009 could be at least 76 per cent of GDP (as of 2010 it was 63 per cent for the US).

Such a proportion indicates a heavy interest burden, which will eventually limit the state’s ability to invest in growth. Thus far the government has been leveraging China’s domestic balance sheet, borrowing ‘expensive RMB now to build projects’ with the intention of making ‘repayment at some point in the distant future using inevitably cheaper RMB’.  142

The demystification of American-style corporations as solidly profitable, transparent and well governed in the wake of the Enron scandal of 2001 and the financial crisis of 2008 only redoubled the Party’s determination to kick away the ladder from American investment banks.  143

The review ends on a limp note:

Whether, when and how China’s working-classes will become a key political force and assert their own independent voices in actual political struggles remains to be seen. 144

That’s rot. The ferment has been going on for nearly 25 years and has sky-rocketed in the past three years.

 2. extracts from ‘Bubble trouble threatens to break China’

By Paul Krugman, Australian Financial Review, 20 December 2011, p. 20.

 Consider the following picture: recent growth has relied on a huge construction boom fuelled by surging real estate prices, and exhibits all the classic signs of a bubble.

There was rapid growth in credit – with much of that growth taking place not through traditional banking but rather through unregulated ‘shadow banking’, neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting – and there are real reasons to fear financial and economic crisis.

            Am I describing Japan at the end of the 1980s? Or am I describing the US in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now.

            I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. All economic statistics are best seen as a peculiarly boring form of science fiction, but China’s numbers are more fictional than most.

[1], 11 May 2011; Asiamoney, August 2011, pp. 66-67.

[2] Beijing Review, 25 August 2011, p. 36.

[3] Beijing Review, 23 June 2011, p. 37; 28 July 2011, p. 38.

[4] The Banker, June 2011, p. 47.

See also Economics