China’s Nightmare Economy

When President Biden called China’s economy a “ticking time bomb” he was uncharacteristically bang on the mark. Most Western capitalist ‘experts’ still lag way behind in their appreciation of the depth and severity of the crisis afflicting the economy and Xi Jinping’s dictatorial capitalist regime. Blinded to some extent by Beijing’s official GDP data, which significantly exaggerates economic growth, many commentators see the current crisis as cyclical in character: a weak recovery following the excruciating three-year pandemic aggravated by Xi’s fanatical Zero-Covid policies.

But China’s malaise is structural, not cyclical. The CCP regime’s debt-driven state capitalist economic model has broken down. The results are: (i) a debt crisis, especially at the local government level, which has been the main driver of investment in China, (ii) falling consumption under the impact of unemployment, wage cuts, and insecurity as the property sector and the value of houses implode, and (iii) historic levels of overproduction and overcapacity spurred on by Xi Jinping’s pet project to build out the “new quality productive forces”, which has unleashed brutal price wars and pushed the economy deeper into deflation. These are all features of ‘Japanification’ of which we have warned for many years.

Contemporaneously, the era of neoliberal capitalist globalization is over, giving way to a new era of imperialist bloc confrontation, war alliances and economic protectionism. The sharpening conflict between Beijing and Washington, as the two centres of this global power struggle, exerts additional and severe external pressure on Xi’s regime, amplifying the above-mentioned internal pressures.

The US-led strategy to cut off China’s access to high-end computer chips and manufacturing equipment is set to tighten again later this year. The decoupling of supply chains is accelerating. Today’s economic protectionism flows along channels carved out by geopolitics — the imperialist bloc conflict, with diminishing trade and investment between the two blocs and more within them.

Here, we can definitely speak of a ‘pressure cooker’ development for Xi’s regime, which will inevitably be transmitted from the economic and geopolitical plane into a more explosive pattern for domestic politics. The dictatorship’s attempts to at all costs maintain “stability” (weiwen) by stepping up repression and censorship will ultimately be no more successful than its efforts to steady the economic ship and revive “confidence”.

The signs of new tensions within the seemingly omnipotent dictatorship were detectable during the CCP’s Third Plenum meeting in July. Unusually, the plenum’s final statements contained fewer references to Xi Jinping and his “Thought”, compared to previous top gatherings. This looks like an attempt to lower Xi’s overbearing profile as a defence mechanism as the mercury of popular discontent rises higher and higher.

A single incident may reveal a certain shift even in the top echelons of the CCP-state, where hitherto Xi has swept all opposition aside. At the start of the Third Plenum, Xinhua published a commentary, “Xi Jinping the reformer”, presumably intended to boost his authority as the meeting convened. The article, which presented a fictitious hagiographic history of Xi’s role in the early years of Deng Xiaoping’s pro-capitalist reform policy, was hastily deleted and expunged from the internet. According to veteran China reporter Katsuji Nakazawa in Nikkei Asia (29 August), the withdrawal of the article was “highly unusual”, reflecting miscalculation and overreach by Xi and his aides. This triggered a huge backlash and “particularly vociferous criticism from retired party elders and ‘second generation reds’”, which then pervaded the atmosphere of the Third Plenum, according to Nakazawa.

Marxists have analysed China’s economic and political crisis extensively in the pages of Socialist magazine as part of our continual updating of perspectives for Chinese and world capitalism. While the entire global system of capitalism is wracked by economic and political crisis, China’s predicament is right now the most serious of all the major economies.

As we go to print, foreign banks and capitalist analysts, among them Goldman Sachs and USB, are downgrading their growth predictions, with many saying Beijing’s “around 5 percent” GDP target is out of reach unless there is major stimulus. On the last point, the clamour is growing louder. But the capitalists have not asked themselves why Xi’s regime so stubbornly refuses to reach for the “bazooka” and juice up the economy with a new version of Wen Jiabao’s 2008 stimulus package, “which saved the world”.

Instead, Beijing’s policies have been incremental — a drip feed of piecemeal measures such as those for the property sector, which have failed to make any impact. If, as some other left organisations theorise, the CCP-state by virtue of its much greater control of the banking system can summon up miraculous “reserves” that are not available to other capitalist regimes, why don’t they do this today? Clearly, the crisis is much more serious for China than was the case in 2008. The answer is that the debt mountain created by that and several subsequent “flood-like stimulus” packages now weighs down upon the economy and limits the regime’s room to manoeuvre.

The three-year property slump is not only continuing, but the pace has accelerated in 2024, with sharper falls in investment, house sales, and an expanding number of big developers needing life support. In August, China Vanke, a partly state-owned property developer and one of the biggest, reported a half-year loss for the first time in more than two decades.

The suddenness of China’s economic reversal is startling. It’s like a high-speed train that has hit the emergency brakes, throwing everyone to the ground, in the words of an unemployed financial sector worker. Last year, the construction sector shed ten million workers — one-fifth of the total. But the jobs crisis affects every sector, with the “curse of 35” hovering over IT and other white-collar jobs. Workers dread this increasingly common practice whereby bosses layoff staff when they reach this age, to replace them with cheaper younger recruits from the massed ranks of the unemployed.

The partial exception to this trend is the ‘gig economy’ where over 200 million (23 percent of China’s workforce) are now working. This sector plays the role of a last-resort employment ‘sponge’, absorbing the young jobless and those laid off from other sectors, but under abysmal, high-stress conditions, with minimal or zero pension and medical cover.

This sector has become the “new normal” in China according to the South China Morning Post. As more workers are driven to temporary and precarious ‘gig’ work, there is huge downward pressure on wages and general conditions. Data from the International Labour Organisation show that between 2018 and 2021, the number of food delivery workers in China with a formal labour contract halved from 43.3 to just 20.7 percent, while the number of workers who had no contract at all reached 41.6 percent in 2021. In cities like Beijing and Chengdu only around one-fifth of gig economy workers are covered by a pension plan.

Seventeen million young people (under-25s) were unemployed in July, according to official data, which significantly understates the real level of youth unemployment. By comparison, the number of under-25s unemployed in the European Union is 2.8 million, only one-sixth of China’s level. This has created a generation of “rotten tail kids”, according to the latest slang on social media, which equates the young jobless with the millions of unfinished and abandoned “rotten tail houses” — buildings without windows, electricity and running water — that blight cities across the country in the wake of the property crash.

According to the South China Morning Post, fourteen of China’s 23 biggest companies have downsized their workforce in the past year. This newspaper investigated the top companies in five sectors — real estate, internet, automotive, finance and electric vehicles — and found them, “almost universally reducing headcounts and slashing salaries.”

Alibaba cut its payroll by 12.8 percent and Poly real Estate by 16 percent. “Earlier this year, ByteDance, JD.com, Kuaishou Technology, Didi Chuxing, Bilibili and Weibo all initiated layoff plans”, the report stated. In the motor industry, where a savage price war is underway, China’s biggest domestically-owned EV makers, including Li Auto, Xpeng, and Nio, all made cuts in staffing levels in the past year.

The SCMP’s report also highlighted a divergence in the behaviour of state and private corporations, with the former cutting salaries and other labour-related costs while the latter have carried out layoffs. Last year, one in three white-collar workers took a pay cut, and in a survey nearly 50 percent said they were afraid they would lose their jobs. Some workers have suffered two pay cuts within the past year as wages and bonus payments are slashed on an unprecedented scale across the economy.

Local government debt

A key ingredient in the deepening economic crisis is the position of local governments, which in many cases have effectively been bankrupted by debt burdens and the blowout from the real estate crash. Local administrations are forced to adopt increasingly desperate measures to generate income.

One aspect of this is the new trend of chasing local businesses to pay “unpaid taxes” dating back years and in some cases decades. Whether the companies in question are tax evaders or random targets, this is clearly happening for one reason only: to plug holes in local government budgets. In the context of the current capitalist crisis, the burden will ultimately fall on ordinary workers as companies offset these extra expenses with more layoffs or wage cuts.

Services are also being slashed and privatisation of government assets is speeding up. More than 20 cities have suspended bus services since 2022. “All urban bus routes are suspended” read posters at bus stops across Nenjiang, a city of 400,000 people in Heilongjiang province last April. In Bishan district of Chongqing municipality, the local government recently announced the formation of a task force with the mission to “smash iron pots and make steel”. This echoes a slogan from the Great Leap Forward of the late 1950s. The policy means an accelerated push to privatize state-owned assets such as buildings and land. In June, a State Council audit found that more than 60 local governments had stolen a total of 2 billion yuan from a fund allocated to provide free school meals to poor children. They used the money to pay down their debts.

At the Third Plenum, the central government came under pressure to offer relief to local governments. But in terms of specific policies the outcome was typically vague. Beijing will look into reforming or even expanding the consumption tax, giving local governments a bigger slice of the pie. But even if this becomes policy, it will be a drop in the ocean.

As Bloomberg (23 July) reports, the consumption tax generated just 1.6 trillion yuan in 2023, which “pales in comparison to the record 15 trillion yuan deficit accumulated by provinces, cities, and towns across China last year, with a similarly dire budget shortfall anticipated for 2024.” If the CCP increases consumption tax under current conditions of already depressed consumer spending, this will become a new self-inflicted wound, exacerbating deflation.

While only a few years ago, Xi’s regime was boasting that China’s rise was “irresistible”, since July it has ruthlessly banned discussion about the “garbage time of history”. This latest expression of online discontent equates today’s regressive Chinese economy with the final years of the Soviet Union. The censors immediately saw it as more dangerous than “lie flat” or “run movement”, because “garbage time” can be seen as a portent of regime downfall.

Overcapacity is everywhere in Chinese industry. Rather than a sign of economic strength and success for Xi Jinping’s industrial policy, this reflects extreme and self-destructive imbalances in the economy, which economists are describing as a form of “neijuan” (involution) or self-harming competition. The number of loss-making Chinese companies has surged by 44 percent in the first half of 2024, according to a study of 500,000 companies by the National Bureau of Statistics. This eclipses the previous recorded peak in 1998, during the so-called Asian Crisis.

These ‘zombie’ companies now account for around 30 percent of all industrial companies in China, up from 7 percent in 2019. This has been accompanied by plant shutdowns and mass layoffs in many sectors including electric vehicles (EVs) and other “new quality productive forces” — sectors incessantly hyped by Xi Jinping as we saw at the CCP’s recent Third Plenum.

“In 2023, just 20 of China’s 77 automakers reported above-60 percent utilisation levels,” reported the South China Morning Post (14 May). Less than half of last year’s car production capacity of 55 million vehicles was used, it said. During the first quarter of this year the situation has gotten worse. NBS data shows that vehicles and green energy equipment manufacturing were among the sectors suffering steep drops in capacity utilisation.

Low capacity-utilisation ratios now bedevil sectors including electronics, pharmaceuticals, building materials and the food and beverage industry. Most extreme is the situation in solar panels, gasoline-driven vehicles, petrochemicals, chips and lithium batteries. The Economist (8 August) reported an ongoing shakeout in China’s semiconductor industry: “In 2023 nearly 11,000 chip-related firms went out of business, roughly 30 a day.”

Another example is the robotics industry, where China now has massive excess capacity in the manufacture of low-end robots, but is still heavily dependent on imported technology and components for more advanced robots.

Under the guiding hand of the CCP-state, Chinese capitalism has swung convulsively from one speculative financial bubble to another. From the world’s biggest property bubble, now a huge black hole that sucks life out of China’s economy, it is inflating a new mega bubble through vast amounts of debt-fuelled investment in manufacturing capacity.

The structure of China’s state-guided capitalism relies on fierce competition between provinces and cities to establish themselves as production hubs to gain from the economic priorities laid down by Beijing. This leads to blind, duplicative and uncoordinated expansion, the opposite of the planned development under public ownership and control that socialists stand for. The result is “a hard-to-reverse overcapacity trap” according to Zongyuan Zoe Liu in Foreign Affairs.

While this is not exactly analogous to the speculative bubbles associated with the West’s financialised capitalism, almost completely divorced from production, investments in the real economy can be hugely speculative under capitalism. The bursting of the US railway-investment bubble in the 1870s caused a financial crisis and industrial depression.

The CCP’s reckless ‘Great Leap’-style industrial policy is driven by economic and geopolitical pressures. It is an attempt to negate the effects of the property collapse and avoid a deeper economic slump. It is also a desperate dash to achieve supply chain and technological self-sufficiency as a counterweight to US-led strategic containment and decoupling.

These policies are massively exacerbating the contradictions of Chinese capitalism — creating deflation, an even bigger debt overhang, and the growing risk of a banking crisis. The most likely breaking point is China’s heavily-indebted local governments, which bore the brunt of the property crash and are now overexposed to the crisis of industrial overcapacity.

China’s domestic market is saturated and cannot absorb the products its factories are making. This forces companies to engage in vicious price wars. Attempts to redirect the excess production into exports are inflaming imperialist tensions and smashing into protectionist walls. At the G7 meeting in Italy in April, the leaders of the de facto Western Cold War bloc took aim at “China’s non-market policies and practises” and “harmful overcapacity”.

This of course weaponizes the issue as part of the imperialist US-China conflict. New trade wars, potentially dwarfing anything seen since the 1930s, are being prepared by governments in America, Europe but even in Asia. Rising protectionism goes hand-in-glove with a big increase in ‘state capitalist’ interventions. Last year, the IMF reported, there were more than 2,500 industrial policy interventions worldwide, mostly in the US, Europe and China. Undergirding this shift is the imperialist bloc conflict.

Rising militarism and preparations for a “war economy”, if not yet for war, spurs the US and other Western governments to try to rebuild their depleted industrial base. The same logic drives Xi’s obsessive quest for self-sufficiency in “new quality productive forces”.

As China’s exports are re-routed from Western markets to the so-called Global South, it faces an upsurge in trade restrictions even from these “friendly” governments. Vietnam, Thailand and Malaysia have recently announced anti-dumping investigations against China, while Indonesia has threatened to impose up to 200 percent tariffs on some goods.

Deflation is wiping out the Chinese capitalists’ profits and creating ‘zombie’ companies, which struggle to generate enough income to service debt payments. Consequently, China’s debt crisis is climbing to the next level.

In June, debt-to-GDP stood at 307 percent compared to 299 percent at the end of 2023, according to data from the People’s Bank of China and NBS. So much for the CCP’s talk of “deleveraging”. Outwardly, Xi’s regime flatly denies there is a problem with overcapacity. Despite its rebuttals in meetings with foreign officials, the CCP regime knows it has a serious issue of overcapacity. In July, the minutes of the Politburo said the country must avoid “neijuan-style vicious competition”.

These are all signs that China is teetering on the brink of a deflationary trap, which in Japan’s case resulted in decades of economic stagnation. Consumer prices in China are basically flat, while factory gate prices have fallen uninterruptedly for 20 months. The recent Third Plenum of the CCP reaffirmed these policies (more half-speed factories, more ‘zombie’ companies, more debt) signalling no fundamental change of course. Secondary opportunistic retreats and zigzags are inevitable however as we see in the “rehabilitation” of the private tutoring sector and reversal of many controls in the real estate sector.

For capitalism, deflation is a more serious sickness even than inflation. It is harder to get rid of deflation. It becomes a self-reinforcing cycle, reducing the capitalists’ will to invest and consumers’ ability to spend as wages are held down. With deflation, capitalism’s traditional so-called macroeconomic tools are largely ineffective. To purge inflation from the economy, a central bank will push up interest rates, sometimes to extreme levels as in Russia today (18 percent). But interest rates are much less effective against deflation.