China and the Crisis of Crisis Theory By Heiko Khoo

14 April 2014 — via

The recent BBC documentary called “How China Fooled the World” presented by Robert Preston claims that China’s economy is about to collapse. The program starts well: correctly showing that China’s state-owned enterprises dominate the economy and shape its development. However, it fails to adequately consider the advantages of this system of public ownership.

China’s problems were presented as a mirror of those that paralysed Western capitalism in 2008. The world financial crisis is said to have caused the Chinese government to embark on an unsustainable, credit fuelled, investment orgy. This generated a colossal property bubble that is now about to burst. This theory corresponds to Western hopes and assumptions that the structure of China’s economic system cannot be responsible for its success. Only private ownership and capitalism can produce success. China temporarily “fooled the world” but now comes the crash.

This is a lesson that developing countries in particular are expected to memorize by heart. Indeed, the entire future of imperialist dominance of the world depends on it. For if other developing counties take the commanding heights of their economies into public hands and embark on development like that in China, their subordination to European, North American and Japanese economic imperialism will surely come to an end.

Since 1989 capitalist strategists, advisors and experts got it wrong about China again and again. For example, the unfortunate professor Gordon Chang wrote “The Coming Collapse of China” in 2001: 13 years later he is still waiting. Some Western Marxists like Alan Woods think China is dominated by capitalism and claim that the world economic crisis was caused by a “crisis of overproduction,” i.e. that workers aren’t paid enough to buy back what they make. Woods predicted that China’s economy would collapse in 2007. Seven years later, China’s economy has grown by 67.7 percent.

The prolific Marxist economic blogger Michael Roberts explained in this column in January 2010, that the global economic crisis was caused by the tendency for the rate of profit to fall. This occurs because private companies seek to maximize profits, and competition compels them to increase the proportion of their total investment spent on machinery and equipment (which Marx called dead labour) vis-à-vis human labor power (which Marx called living labor). As human labor power is the only commodity that produces new value, and as the proportion of dead labor in total investment increases over the long-term, the rate of profit inevitably tends to decline. This process is an inexorable law under capitalism.


Four years ago Roberts explained “that the law of the Tendency of Rate of Profit to Fall does apply to China, but when asked about the potential for China to overcome the impact of this tendency through the intervention of socialist planning principles; to counteract investment strikes caused by low profit rates affecting the private sector, he agreed that public ownership of the commanding heights of the economy would enable China to escape the laws of motion of capitalism, even though it operates in the global market.”

In the West, as a consequence of the long-term fall in the rate of profit in the productive sectors of capitalism, capital poured into speculative investment in non-productive sectors of the economy. As money begat money, without any production to back it up, money appeared to come from nowhere. Great theories were conjured up to explain this and Nobel prizes were duly awarded to economic magicians, including Harry Markowitz, William Sharpe, Robert Merton, Myron Scholes, Robert Engle, Franco Modigliani and Merton Miller.

Now let us return to the BBC’s programme on China: Robert Preston interviewed prominent economic gurus from the Western financial world. The ever-grumpy Charlene Chu, a former China specialist for Fitch credit rating, offered ominous warnings of an impending catastrophe in China. Apparently her miserable predictions about China have earned her a “Rock Star” status in the U.S. financial world. Chu claims China’s banks are insolvent due to an unsustainable credit and property boom.

Western political ideologues and neoliberal economists find this reassuring. If China’s political economy is experiencing the same banking crisis that brought down the West — just on a grander scale — then the idea that there is something structurally superior in China’s economy is disproven. Consequently the free market model is still the best possible system invented by man or God.

However, the BBC program exaggerates the influence of exports in China’s growth. When export demand collapsed in 2008 and millions of workers were laid off the impact on the economy and society was short-lived. Whilst wages in Europe and America fell from 2008-2014, they rose dramatically in China. The Labor Law of 2008 significantly improved workers’ rights and encouraged workers to fight to enforce the law. The Communist Party of China acted to advance workers’ rights at a time when there was a big rise in unemployment. By contrast economic contraction and rising unemployment in the wealthiest capitalist countries meant ruthless wage cuts and austerity.

The BBC’s tale of impending collapse is built around the myth that China’s expanding debt is just like the property and debt bubble that burst in the West. As the West had a property bubble associated with cheap credit it is assumed that investment in construction and property in China is the same phenomena. However, in England and America easy credit encouraged people to take out mortgages of 100 percent or more — mainly to buy second hand buildings. Mortgage deeds were bundled together from all around the world and sold as packages called collateralized debt obligations (CDOs) and their future prices rose stratospherically. But these deals produced no new value — nothing was being made to back up the money. Buying or selling a house creates no value. And private banks buying debt obligations on second-hand property also creates no value. So lots of “money was made” without making anything and “fictitious capital” ruled the roost. Prices and values are not the same thing but this can be difficult to grasp; particularly by those who live by making money from money.

The empty urban suburbs in some cities in China are often presented as proof of an exploding property bubble. Surely this is just like the empty buildings of Chicago or Detroit in the USA? Of course as China is building new homes and communities for hundreds of millions of people under its urbanization plan, there will inevitably be gaps between construction and occupation. This is exaggerated by bureaucratic errors as well as speculative investment. The new rich seek to turn their cash into property assets. However, this still does not mean that China’s housing market is experiencing a Western style property crash.

According to Western doom-mongers, an imminent collapse in Chinese property prices will drag down China’s banks and provoke mass social unrest. In the famous ghost-town district of Kangbashi, located in Ordos in Inner Mongolia, the residency rate stands at only 5 percent of its 1 million potential. Nevertheless nearly all apartments there have been sold. So, despite a fall in prices: this won’t cause a “collapse;” impoverish mortgage holders; or provoke mass social unrest. For property owners who buy apartments as an asset, the price of their property is only important if they plan to sell it or if they can’t afford the mortgage.

Some simple measures by the state could eliminate China’s vacant property scandal overnight. Where demand for accommodation is high, government agencies could impose compulsory management orders on lessees in order to force them rent out their property. If this is combined with state controlled rents, for fixed or indefinite terms, it can increase the general availability of low-cost rental accommodation and bring the owners some compensatory revenue. This can help maintain the property and pay the mortgage. It can also act to bridge the divide between those who can afford to lease, and those who can’t afford to rent or buy. Under the 12th Five Year plan (2011-2015) the government is building 36 million apartments for low cost rental or for sale. This house-building boom for people on low-incomes also acts to replace the fall in private sector investment.

Infrastructure investment is often funded by land sales. This advances the general productive potential of society. By investing now in modern infrastructure that will last more than 100 years; China is taking advantage of its present low labor costs, to lay the foundations of a better tomorrow. The concentration of resources in urban areas brings ever improving transport, education, housing, welfare and health services, and lays the foundation for big strides forward in labor productivity. The planned integration of 100 million migrant workers into the formal urban workforce by 2020 will greatly expand the workforce and produce real new value and societal wealth. China’s credit and investment boom is not a speculative bubble.

Heiko Khoo is a columnist with

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