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China: Devaluation promoting global instability

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Five weeks after the government intervened to prop up prices on the Shanghai Stock Exchange, share prices are still showing great volatility. On August 18, they closed down a whole 6 percent and, at one point the following day, they were down by a further 9 percent, with more than half the registered companies down by the maximum daily limit of 10 percent. Later, prices recovered to 3,794.11, an increase of 1.2 percent on the day.

Immediate causes of these ups and downs include computer-driven trades programmed to follow trends in the market and the attempts by traders to take advantage of the government's commitment to holding the Shanghai Index close to the 4,000 mark. In the course of the day it was announced that Central Huijin Investment, which is the government's investment company, had invested a further 20 billion yuan (some £2 billion) in Chinese banks in pursuit of its goal. Nonetheless, several banks, including Bank of China, the Construction Bank and the Agricultural Bank all closed down on the day.

Behind the jitteriness, however, there are powerful pressures that would force the markets further down if regulations allowed. Last week's decision of the central bank, the People's Bank of China, PBoC, to devalue the yuan on three consecutive days has further eroded confidence after the collapse of prices in early July. The devaluation was seen as a response, perhaps a rather panicky response, to a series of downbeat economic figures.

Exports in July were valued at US$195.1 billion, down 8.3 per cent from a year ago, and imports fell for the ninth consecutive month, by 8.1 per cent year on year, to US$152.1 billion. On top of that, business activity in July fell to its lowest level since 2013 according to the Caixin/Markit China Manufacturing Purchasing Managers' Index, which slid to 47.8 in July, down from 49.4 in June. Any figure below 50 on this scale represents a contraction.

The implications of these figures were then driven home by the publication of the latest official figures for GDP growth rate, just 7 percent in the first half of the year, the lowest for decades. Taking all these figures together, it is clear that China is unlikely to reach its target of 7 percent GDP growth this year. And that is the official figures; unofficial projections, based on proxies for economic output such as electricity generation, energy consumption, shipping volumes and railway tonnages, suggest real economic growth may be lower than 5 percent.

The fear is that, by taking steps to shore up the domestic economy, Beijing will effectively torpedo the faltering recovery of the global economy. In the aftermath of the huge financial impetus of some $400 billion, by which Beijing offset the global financial crisis and depression after 2008, official policy was for a moderate slowdown in GDP growth, accompanied by a “rebalancing” of the economy away from infrastructural and production investment and towards increased consumer spending.

However, while the economy is certainly slowing, the desired rebalancing is not happening and the pace of decline looks to be going out of control. To counter this, Beijing appears now to be trying to stimulate the economy by its devaluation, which will make exports cheaper for other countries to buy but imports from abroad more expensive, encouraging sales of domestically produced goods.

The fear is that this will prompt a series of competitive devaluations by other countries as each tries to increase its exports while reducing imports, a scenario in which global trade as a whole would decline, to all countries' disadvantage. Nowhere would this be more true than for China; while Beijing may in the long term want to reduce dependence on exports, at the present time that would be entirely counter-productive.

Moreover, because the yuan has been pegged to the US dollar since the global crisis, Chinese goods have steadily increased in price as the dollar has strengthened over recent years. In fact, over the last decade, the yuan has appreciated by some 30 percent as against the dollar so the relatively mild devaluation, less than 4 percent at present, could be presented as a legitimate correction rather than an aggressive initiative.

Viewed from the perspective of China's overall development, it may be the method behind the PBoC's devaluation that is more significant than the scale of the devaluation itself. Announcing the policy on August 11, the central bank explained that, in future, the value of the yuan would be allowed to move within a 2 percent range every day, with its target rate set each day in relation to price movements on the previous day. Thus, if the exchange rate on a given day falls, or rises, by its maximum of 1 percent, that new rate will become the central point of the allowed range the following day. Over a period of time, this would mean that “market forces” could, slowly but surely, set the value of the yuan. Indeed, within four days of the initial devaluation, this led to a slight increase in the exchange rate of the yuan against the dollar.

This is an important change of methodology, away from the central bank simply declaring the exchange rate and intervening in the markets to maintain it. It is entirely in keeping with government policy to continue dismantling those elements of state regulation inherited from the past and maintained until now to ensure a high degree of state control, even though planning as such was abolished nearly twenty years ago.

Quite apart from any immediate impact on imports and exports, the aim of the policy is twofold; firstly, to strengthen the yuan's claim to inclusion in the IMF's basket of currencies upon which it bases “Special Drawing Rights” and, thus move towards the status of a reserve currency and, secondly, through greater exposure to global markets to increase the commercial pressure on Chinese companies to meet international standards of productivity and quality.

The first of these may already have drawn a step closer as a result of the devaluation; the IMF announced a delay in its decision on any change in its current basket of currencies (dollar, yen, euro and pound) until October next year, a very clear sign that the yuan could then be included.

A clear example of the second issue is provided by the car industry. China is the world's biggest producer of cars, in the last year output reached 24 million vehicles, more than the US and Japan combined, but, whereas in those countries there are just a handful of manufacturers, in China there are more than 170 and their total capacity outstrips the domestic market by 11 million vehicles! Some 30 percent of capacity is therefore idle because standards of production are too low for the world market. Inevitably, there has to be a huge process of amalgamation to centralise and concentrate capital, investing in production technology that will allow the development of foreign markets.

That is just one aspect of the urgent need to bring the internal mechanisms of the Chinese economy into line with the norms of more established imperialist powers whose monopolies and banks are the products of a century and more of capitalist competition and development, rather than of the bureaucratic planning that laid the basis for China's industry.

At the same time, China is also developing the other features characteristic of a fully fledged imperialist power. By 2013, the export of capital had reached an annual rate of $140 billion with target countries as diverse as Mongolia, Nigeria, the USA and UK as Beijing seeks to ensure not only supplies of raw materials and energy and markets for its own goods but also production facilities abroad.

The fundamental drive to increase productivity by replacing living labour with machinery is nowhere clearer than in the province of Guangdong, for decades the most advanced region in China. In April this year, work began in the city of Dongguan on the first fully robotised factory. Shenzhen Evenwin Precision Technology Company's new plant will employ only 200 workers, rather than its current 1,800.

Emphasis on promoting “market forces” to bring about such changes does not, however, mean an end to state intervention and supervision. Guangdong Province itself expects to spend 943 billion yuan (some £90 billion) in the next three years on subsidies to firms either producing or installing robotised production lines.

In the longer term, China's continued evolution as an imperialist power will obviously have huge consequences both domestically and internationally. However, of more immediate concern is the effect of the current slowing down of the economy on the rest of the world. China played a key role in pulling its supplier countries such as Brazil, Nigeria and Australia out of the post crisis downturn. Now, that effect is waning. In addition, devaluation will reduce imports of higher value goods such as machine tools and luxury cars, particularly from Europe whose economy is already weak. In short, from being a source of stability in the global economy in the period immediately after 2009, China is fast becoming a principal source of instability.