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.