‘Let me acknowledge Australia’s robust economy, richness of resources and continuing good fortune to be shipping out the kinds of things China demands’. So wrote Stuart Washington in the Sydney Morning Herald (21.3.11:Bu9). His cheeriness came at the foot of a column spotlighting the down-side from the Sendai earthquake for our dollar. His assumption that China will save us has pervaded commentary about how Australia weathered the first three years of the global financial turmoil.

These commentators contend that the China boom will last for anything between five and thirty more years. It is rare for a local expert to raise the prospect that the Chinese economy might go the way of the US bubble in 2008. Such a collapse would shrink revenues to all levels of government here, with consequent spending cuts to rival the severest in Europe.

There is no excuse for this lop-sided outlook. Early in March, the international ratings agency, Fitch, reported a 60 percent likelihood of a financial meltdown in China within the next two years. (China Economic Review, 8.3.11) The Australian media and officialdom are deaf to such predictions.

Fitch’s announcement came too late to include in my summary of what Chinese authorities have been saying are the fault lines in their economy. That 18,000-word account, entitled ‘Chinese crackers’, appears on . Here is an outline of the problems it identified from statements by Chinese officials and experts:

  • excess liquidity and inflation fueling property bubbles;

  • a manufacturing sector launched on snapping together imported components; foreign-ownership of manufacturing and services, with global cartels directing supply chains;

  • regional government insolvencies; a banking system carrying undisclosed loads of doubtful debt; a stock market corrupted by state policy, and primitive bond markets;

  • massaged statistics and lack of  transparency;

  • excess capacity; unproductive infrastructure; and no nation-wide market;

  • turbulent workers, peasants and nomadic unemployed.

On top of these internal difficulties, China is vulnerable to contractions in effective demand for its products across global markets.

What follows is drawn from reports in the six weeks since I posted ‘Chinese Crackers’. 

In mid-February, China’s Economic Information Daily identified ten interlocking problems facing Beijing authorities as they embarked on their twelfth five-year plan. Here, it is possible only to list them with snippets from the excerpts that appeared in the semi-official Beijing Review (24.2.11: 32-33, on-line):

  1. Monetary policy, that is, the supply of cash and available funds (M2), also known as liquidity. Its excess remains the core threat in the short-term. The target for 2011 is set lower than it was in 2010; previous tightening measures are yet to take effect.

  2. Housing market will dampen. Prices in seventy major cities will decline; 60 percent of potential buyers will wait and see.

  3. Consumer prices are nudging 5 percent according to an Index which under-estimates the costs of housing, health and education; the Production Price Index is at 6.6 percent. Beijing Review (3.3.11) carried six articles on Inflation, with headlines about ‘How Inflation Is Stealing Profits’.

  4. Increasing use of the yuan to settle cross-border trade with other emerging economies, but not with major trading partners in the developed West.

  5. Emerging high-tech industries are expected to reach 8 percent of GDP by 2015.

  6. Income distribution has favoured government revenues ‘rather than the people, and that’s why our domestic consumption remains gloomy’, although minimum wages are rising.

  7. Bond market remains only 8 percent of GDP compared with 100 percent in the USA.

  8. Stock markets will contract because of higher interest rates so that the real estate sector ‘will not be able to drive the whole stock market up’.

  9. Energy prices ‘will see a marked trend up this year’, with renewables pushing them higher, and hence inflating costs for producers and consumers.

  10. Banks will slow their lending and see profits drop by 15-20 percent.

Even to catalogue these problems gives some idea of the grounds for Fitch’s warning of a 60 percent chance of a financial meltdown by 2013. The fact that the Chinese themselves set out this array of difficulties will shock those who rely on the mass media for the perception that China is about to takeover the world.

One of those scare stories is its threat to US imperialism. The economic base of that alarm is moving from protests against the mass production of cheap clothing onto fears about high-tech developments. Professor Hout, from Hong King School of Business, provided the context in an interview for ABC Radio National’s ‘Future Tense’ (10.2.11):

China has shipped a lot of goods over the last 15 to 20 years, but they haven’t made much money … because the brand and the technology … were owned by foreign companies.

Those firms import machines and parts for the products that are then snapped together. Not surprisingly, Beijing wants to increase the locally-sourced components through joint ventures. Hout pointed out that the experience of joint ventures has been that very little expertise flows onto locally-owned firms.

Professor Jack Dongarra, who keeps the official list of the world’s 500 fastest computers, told the ABC that China had just taken number one spot. However, although the Chinese model uses locally created interconnects, it depends on Intel and Invideo graphics for its processors - one of the three main elements. Dongarra added that Chinese spending on R&D as a percentage of company turnover has been around half of that in the US of A.

The impact of these factors on the population is clearer once the focus shifts from the national perspective to a local instance. The town of Xintang, close to Guanzhou, is the denim capital of the world, home to a million factory workers making 260 million pairs of jeans a year, a third of the world’s output. The industry has become one more victim of the building bubble. Fewer young men are prepared to work for low wages when they can earn much more in construction. In addition, the price of cotton has cut into the margins. After two years without any profit, some factories are refusing orders. (Canberra Times, 28.2.11: 13)

Many of the difficulties in China are the frictions found in any economy. Even their combination need not derail ‘the engine of the world’, as the Chinese like to see themselves. Some problems, however, are structural. The distortions and illegalities that seemed contingent on the 2009 stimulus spending erupted out of deep-seated flaws, compounded by corruption.

A common mistake by economic commentators is to extrapolate trends, in this case, projecting China’s growth off the graph. This un-dialectical approach ignores the need for a qualitative change if China is to avoid the fate of several countries that been kick-started thanks to cheap labour and raw materials. As soon as wages and prices rose, they fell into a ‘middle-income trap’. That is the situation in China where iron-ore prices went up by 66 percent and wages by 10 percent last year. (Beijing Review, 3.3.11, p. 35)

Chinese planners have to find jobs for up to fifteen million more workers every year. The leadership fears unrest from declines in spending power and from the spread of unequal incomes. Beijing is trying to balance demands for higher real wages with the need to maintain cheap exports until high-tech ones expand and domestic demand can drive expansion. That realignment would be stressful enough in good times.

China does not rule the world – militarily or economically – and is not about to do so any time soon. What is unavoidable is that China will fall into at least one ditch as it pursues ‘harmonious development’. Chinese capitalism would indeed be unique if it never took a tumble. The closer it comes to being a market economy, the more it is subject to the business cycle. Beyond those short-term ups and downs, it cannot escape a long trough like the ones that overtook Britain between 1873 and 1893, the world in the 1930s, or Japan since 1990.

The Chinese workers are in several ways better prepared than their Australian counterparts for the bitter struggles that must follow from any contraction of demand for mineral imports.