Chinese stock bubble no panacea for low wages

China increasingly finds its journey to capitalism to be difficult, all the more so since the government’s strategy of inflating a stock-market bubble has not worked better than it does elsewhere.

Although, thanks to increasing worker militancy, wages are rising in China, it does not appear that China’s leaders have made any real progress in tackling over-reliance on investment and a low level of consumption, while inequality continues to rise. Encouraging working people to throw money into Chinese stock markets — much of which was borrowed — isn’t a substitute for a strong social safety net and living wages.

The corporate media is grumbling that measures Beijing has taken to stabilize its stock markets amount to a backtracking on its commitments to capitalist markets, but China’s integration into the global economic system is hardly at risk. The ruling Communist Party made its goal of increasing integration quite clear two years ago, when it set its economic goals at the 18th Party Congress’ Third Plenum.

The recently built, empty Chinese city of Ordos, Inner Mongolia (photo by Uday Phalgun)

The recently built, empty Chinese city of Ordos, Inner Mongolia (photo by Uday Phalgun)

At the time, corporate-media writers were disappointed the party did not choose to become a pet of the International Monetary Fund, evidently unable to read beyond the self-congratulatory slogans the party issued about its leadership. The party stated firmly its continuing commitment to capitalism, but also that its ongoing adoption of markets would be gradual.

This was clear enough at the time: The party’s communiqué following the Plenum stated it “must closely revolve around the decisive function that the market has in allocating resources” and would “accelerate the construction of free trade zones.” Xinhua, the official Chinese news agency, stressed that “The role of the market in China has officially switched from ‘basic’ to ‘decisive,’ and is key to understanding the reform agenda.” Earlier this month, President Xi Jinping reiterated this commitment:

“An important goal for China’s current economic reform is to enable the market to play the decisive role in resource allocation and make the government better play its role. That means we need to make good use of both the invisible hand and the visible hand. … To develop the capital market is a key goal of China’s reform, which will not change just because of current market fluctuations.”

When real estate cools, inflate a stock bubble

A rapid increase in debt and the petering out of a long real estate boom are two reasons said to be behind the inflation of a Chinese stock-market bubble. (A reversal of the order in the U.S., where a real estate bubble was inflated to counteract the burst of the 1990s stock bubble.) A McKinsey Global Institute study found that China’s total debt (corporate and all levels of government) quadrupled in seven years, reaching $28 trillion in mid-2014, a total nearly triple the country’s gross domestic product. The study says:

“Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable.”

Arguing that the stock-market rally was “clearly sponsored by the Chinese government,” economist Alicia García-Herrero said the bubble was inflated to provide local banks and corporations with new sources of capital. But what goes up eventually comes down, a turn compounded by the high rate of borrowing that fueled stock purchases. There were two proximate causes of the crash, Ms. García-Herrero writes:

“First, there was a wave of profit taking after the Shanghai benchmark index broke through 5,000 in early June and doubts emerged about further easing from the [Chinese central bank]. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.”

The benchmark Shanghai Composite Index reached its peak on June 12 and has fallen by more than one-third since, wiping out about US$3.3 trillion of value. Apologists argue that the Shanghai Stock Market is still well above where it was as recently as mid-2014, which is true, but the current value of Chinese stocks aren’t so impressive when looked at in a longer time frame — the Shanghai Composite Index is today where it was in November 2010.

Beijing has taken a series of steps to stabilize Chinese stock markets, including halting initial public offerings, cuts to interest rates, directing national pension funds to buy stocks, and instituting a new rule that large shareholders and managers must not reduce their holdings for six months. Alleviating the stock-market crash appears to be seen by the party leadership as a necessity to dampen potential social unrest due to the massive borrowing by mom-and-pop investors encouraged by the government. A ninefold increase in margin lending by brokerage firms over the past two years fueled the bubble, according to The New York Times.

Devaluation in response to export slowdown

The summer’s stock-market crash coincides with signs that China’s economic growth may be slowing. Chinese exports and imports were both down sharply for July and August, and in response, Beijing intervened in foreign-exchange markets to force a small decline in the value of the renminbi. But that devaluation appears to have backfired as market pressure would have forced the value of the renminbi to continue falling, below China’s target, causing Chinese financial officials to further intervene to prop up the value of their currency.

Although right-wing politicians apparently believe China’s government sets the value of its currency by decree, in fact China (as do many other countries) has to spend considerable money to maintain its value to counter the force of currency speculators. The yen, euro, U.S. dollar and Swiss franc are among the currencies whose values have been pushed down at various times due to government spending. Countries that do not possess the reserves to do this are completely at the mercy of speculators.

China does have reserves, due to its large trade surpluses, and is believed by Bloomberg Business to have spent US$315 billion in the past 12 months propping up the renminbi. In August alone, China spent $94 billion to keep its currency from falling further in value.

OK, what does all this mean? The idea that China has built a wall that keeps out the world capitalist system simply isn’t so. China, in contrast to other developing countries, is big enough to set some of its own rules and push back against U.S. domination. But its integration into world markets means it is ultimately subject to the whims of those markets. Those are very real forces: Markets are not impartial, disinterested mechanisms sitting loftily in the clouds — they represent the aggregate collective interests of the world’s most powerful industrialists and financiers.

It is those interests that are behind the massive transfer of production to China and other low-wage countries. No enterprise is more responsible for this transfer than Wal-Mart Stores Inc., which leverages its size, innovation in computerizing its inventory and tight management of its suppliers to squeeze those suppliers. If a manufacturer wants to continue to have contracts to supply Wal-Mart, then it has no choice but to ship its operations overseas because it has no other way to meet Wal-Mart’s demands for ever lower prices.

Wal-Mart, although the most ruthless, is far from alone in this business practice. Apple Inc. accrues massive profits by contracting out its manufacturing to subcontractors. A 2010 paper by Yuqing Xing and Neal Detert found that Chinese workers are paid so little that they accounted for only $6.50 of the $168 total manufacturing cost of an iPhone. Of course iPhones cost a lot more than $168 — an extraordinary profit is generated for Apple executives and shareholders on the backs of Chinese workers.

By now, those Chinese workers earn more, although they still represent a minuscule cost against a gigantic profit. Wages have been increasing in China in recent years fast enough that wages doubled from 2009 to 2015. Yet inequality is rising in China; as measured by the gini co-efficient, the standard measure of inequality, the income gap has grown more there in the past two decades than in any other Asian country.

Chinese labor share of economy remains small

Thus, when measured against the overall economy, China’s workers are not really doing better. By one measure, a study by two University of Chicago business professors, the labor share of China’s gross domestic product was a woeful 36 percent in 2010, compared to 58 to 60 percent for Japan, the United States and Germany. That share was above 50 percent in the 1980s. (The trend of those percentages in each country is down.)

Another way of analyzing this is in household consumption: The share of household consumption in China’s gross domestic product in 2013 was 36 percent (this was the latest figure available), representing a continual decline from 47 percent in 2000. Household consumption in advanced capitalist countries tends to be between 58 and 72 percent of GDP. Finally, China’s capital investment remains extraordinarily large, accounting for 48 percent of GDP, far above what other countries spend and as high as it has been in the past.

China’s growth is still overly dependent on building infrastructure and exports, and despite still low wages production is already being transferred to other countries with still lower wages. The average factory worker in China earns $27.50 per day — pitiful by Northern standards, but much higher with the $8.60 in Indonesia and $6.70 in Vietnam. But higher wages are not distributed evenly in China. The minimum wage varies considerably among provinces and in six of the most important cities, the minimum wage is less than 30 percent of the average local wage even though Chinese law prescribes it should be at least 40 percent.

Although Chinese authorities often meet worker unrest with repression, concessions are also offered, enabling the increases in wages. Such unrest is growing more widespread: China Labour Bulletin reports that 1,642 strikes have taken place in China in 2015, more than all of last year. Strike totals are as follows:

  • 1,642 strikes in 2015 (total reported as of September 22)
  • 1,379 strikes in 2014
  • 656 strikes in 2013
  • 382 strikes in 2012
  • 185 strikes in 2011

Alternative organizations are leading many of these struggles due to the lack of effective trade unions, the Bulletin reports:

“Labour rights groups, especially those in Guangdong, emerged to play the role a union should be playing, supporting workers in their struggle with management, helping them to conduct collective bargaining and maintaining unity and solidarity.”

What the future for China will largely depends on its working class’ ability to organize, a difficult task in the face of tightened repression. To what extent President Xi’s anti-corruption campaign really is an effort to root out corrupt “tigers and fleas” and to what extent it is a continuing purge — the “tigers” thus far are primarily associated with former President Hu Jintao — is difficult to know given the opacity of the party and the factions that contend within it. That the politically connected and coastal elites within China have become wealthy signals there is a powerful bloc within the party committed to the path it has taken since the Deng Xiaoping era.

Northern, and especially U.S., capitalists have profited well from China’s policies, too. Thus it behooves U.S. and Chinese working people, Northern and Southern workers, to recognize their common interests. Industrialists and financiers around the world are united in their neoliberal drive; we can only defend ourselves on an international basis.

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6 comments on “Chinese stock bubble no panacea for low wages

  1. The slowdown of the Chinese economy is really affecting New Zealand. Our major export is milk powder and our major buyer is China. China imports it like made to enable young mothers to move from their villages into industrial centers. The milk powder makes it possible for grandparents to keep their infants in the villages and feed them.

    The sudden drop in demand for milk powder has been a total disaster for our farmers, as most are deeply in debt. Many are selling up and a good few are killing themselves.

    • Farmers often are hit the hardest during times of economic upheavals, when they aren’t being driven to the brink of bankruptcy by the multi-national corporations that gave gained control over agriculture and dictate terms to them.

  2. Micky says:

    Always enjoy reading your articles regarding China. It sounds like China is trying to keep a stagnant economy moving by a real estate and stock bubble. Are they facing a collapse similar to what the US saw in 2008? If so, what ramifications will that have for China, the US, and rest of the global economy? Thanks

    • Greetings, Micky. Thanks for the question. Given that, even with its over-reliance on investment, China has considerable room to grow yet, I do not see a 2008-style collapse as a realistic possibility. What might prove someday to be a better analogy is the long stagnation in Japan. There was a rapid advancement to core-capitalist-country status for Japan, but it, too, was overly reliant on investment — building more highways, bridges and other infrastructure than was needed. At the same time, real estate prices rose extremely sharply, beyond any reasonable valuation.

      Eventually, the bubble burst and Japan has had a couple of decades of stagnation. Nobody talks anymore of Japan’s rise to becoming the most powerful economy, talk that was fairly common in the 1980s. But we shouldn’t be too loose with our analogies — today’s China is not 1980s Japan and the future of China is not necessarily that of Japan. The political economist Minqi Li, in his book The Rise of China and the Demise of the Capitalist World Economy, laid out four possible scenarios for where China might go. I discussed the book and those scenarios in a 2012 post, and I would consider Rise of China the best discussion on China I have yet read.

      As the book’s title indicates, Professor Li believes that China is too big for capitalism to absorb — either China fails in its quest to become a leading economic power or its successful rise will displace many other countries, leading to chaos. Influenced by world-systems theory (as I am as well), the basis of this thesis is that there is room for only a small number of core capitalist countries, below which are semi-peripheral and peripheral countries, and that the world capitalist system is dependent on the exploitation of countries lower on this order.

      Whatever happens to China will have profound effects on the rest of the world, which has become dependent on China as a source of low-cost labor and as an export market. Both of these conditions are eroding, taking away a hoped-for escape from stagnation in the advanced capitalist countries. At the risk of sounding glib, the only safe prediction might be that we will be living in interesting times.

  3. Godfree Roberts says:

    A few cautionary comments on some of your assumptions, all of which are in line with media reports and none of which happen to be true:

    “the government’s strategy of inflating a stock-market bubble”?
    The government was in its sixth month trying to deflate the stock bubble, but 40 years of decadal, 100% wage rises fuelled unbridled optimism and funded a briefly frothy market. Anyone who’d invested in that market a year ago is still up 100%, so it’s not a big deal.

    “The China Securities Regulatory Commission, took steps to try to dampen the last six months of market run-up. It tightenedmargin requirements in January 2015. It did it again in April. At that time it also facilitated short-selling, by expanding the number of stocks that could be sold short. And the event which apparently in the end “pricked” the bubble was the June 12 announcement by the CSRC of plans to limit the amount brokerages could lend for stock trading.

    The adjustments in margin requirements are the sort of counter-cyclical macro prudential regulatory policy that we economists often call for, but less often see in practice among advanced economies. Perhaps surprisingly, it is more common in Asia and other emerging markets. A recent study, for example, found that China and many other developing countries adjust bank reserve requirements counter-cyclically. Another found effective use of ceilings on loan-to-income ratios to lean against excessive housing credit.

    Yes, the extraordinary run-up in stock market prices from June 2014 to June 2015, when the Shanghai stock exchange composite index more than doubled, was fueled by an excessive increase in margin borrowing. Reasons for the increase in margin borrowing include its original legalization in 2010-11; easing of monetary policy by the People’s Bank of China since November 2014 in response to slowing growth and inflation; and the eagerness of an increasing number of Chinese to take advantage of the ability to buy stocks on credit.

    Nevertheless, the stock market regulator responded by leaning against the wind. Similarly, when the People’s Bank of China has intervened in the foreign exchange market over the last year, it has been to dampen the depreciation of the yuan, not to add to it. These are not trivial points.” – Jeffrey Frankel.

    “thanks to increasing worker militancy, wages are rising in China?
    Militancy has been steady and wages have been doubling every ten years, regular as clockwork, for 40 years.

    “it does not appear that China’s leaders have made any real progress in tackling over-reliance on investment and..”?
    Far from being over-reliant on investment, the Government of China is still making out like a bandido on its investments: “Is Government Spending a Free Lunch? — Evidence from China – Federal Reserve Bank of St. Louis Working Paper. Xin Wang and Yi Wen: “Perhaps even more exceptional is China ís extensive use of government spending as a major policy tool to stimulate the economy over the past three decades. Based on both aggregate time-series data and panel data from 29 Chinese provinces, we find that the fiscal multiplier in China is larger than 2”.

    “a low level of consumption”?
    It hit 55% this year. Good progress.

    “inequality continues to rise”.
    No. Inequalities stopped rising in 2013 after GINI scores were factored into provincial promotions. They’re currently flat and we’ll get a big update in March. In the meantime the Land Tax will come into law this year and the Inheritance Tax will wend its way through the legislature. If we removed locational inequality (difference between inland and coastal provinces) from China’s GINI score it would fare well against the OECD countries.

    • I’m very much sorry to tell you that you are the commentator who is writing what is not true. And you clearly did not pay attention to what I wrote. I’ll pass over the silliness of your claim that what I wrote is “in line with media reports”; media reports routinely whine that China is not really capitalist when it clearly is, as I have analyzed in multiple articles on the country over the past three years.

      I won’t bother with refuting your claims point by point as it would be tedious for readers. I’ll confine myself to merely a few to illustrate. The market is up 100% from a year ago? You are cherry-picking facts, and that “fact” is false: The Shanghai Index is up 31 percent from a year ago. The market is flat over the past five years — the Shanghai index is almost precisely the same as it was in November 2010, something you could discover with 30 seconds of research, about how long it took me.

      The market is down sharply from its early-summer high and as you should know, when bubbles burst, the norm is that many years pass until such heights are reached again; and by no means are further declines excluded. It was precisely during the bubble that Chinese working people were induced to invest; thus they likely piled in near the peak and thus have suffered significant losses that they can ill-afford considering the lack of a social safety net. That much of those losses are on stock bought with borrowed money only makes it more tragic.

      Stock markets are rigged casinos, rigged in favor of financiers and speculators; asking ordinary people to throw their savings into them instead of providing pensions and a safety net is criminal, to put in plainly. That is so in the U.S., in China or anywhere else.

      As to rising wages in China, it is only in recent years that wages have risen significantly. In the November-December issue of New Left Review, Hung Ho-Fung’s article, “America’s Head Servant?,” laid out the low wages and over-investment in China. Wages in China in fact were flat, at about five percent of U.S. wages, from 1980 to the late 1990s, only beginning to rise, slowly, from the end of the 1990s until deep into the 2000s. So the doubling of average wages from 2009 is a recent and new phenomenon, precisely due to worker militancy.

      Also, let us keep in mind that ultra-low wages was the reason for Western and East Asian multi-national capital to move production to China; had wages been “doubling every 10 years,” as you incorrectly claim, there would have no such stampede to build a massive bastion of sweatshop labor there.

      As a final point, the share of consumption in Chinese GDP is less than 40 percent and has been for several years; wages as a share of GDP are also low and down from earlier years. Those are simple facts, available from multiple sources including the World Bank, and remain facts despite their being inconvenient for you.

      I’ll stop here. What I recommend is that you read Hung Ho-Fung and Minqi Li, and other authors in Monthly Review, so that you can educate yourself on China.

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