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Downturn spreads to China

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The third quarter of the year, July, August, September, should be the busiest time of the year for China's toy factories. That is when production reaches a peak so that the goods can be packed into the biggest container ships in the world in time for the Christmas markets in the US and Europe. But this year is different.

This year the factories are not only not busy, they are closing down. The Guangzhou, Daily, reports the vice-chairman of the Toy Industry Association in Dongguan, a major industrial city in the Pearl River Delta near Hong Kong, saying "of the 3,800 toy factories in Dongguan, no more than 2000 are likely to survive the next couple of years." Nor are toys the only consumer goods sector that have seen this dramatic slump; in Shenzhen, also in the Pearl Delta, Bailingda, a firm producing small consumer electrical goods such as coffee pots, irons and toasters, with an output of some 5 million units per year, closed down two weeks ago, putting 1,500 out of work. The full range of firms affected, and the immediate cause of their difficulties, is not difficult to discover. At the International Trade Fair in Guangzhou, better known in English as the Canton Fair, held in mid October, the total volume of trade was $16.45 billion, down 10.8% from last year. More specifically, orders from the US were worst affected, down some 30% to $1.63 billion with hardware, tools, machinery, vehicles and spare parts registering the biggest drops. In other words, it is the developing recession in the US that is hitting Chinese export manufacturing. One important component of that is a collapse in consumer spending. And what a collapse! In the same third quarter, consumer spending in the US fell at an annualised rate of more than 3%, the sharpest decline since records began in 1947. With an eye to the future, it should also be borne in mind that these figures were collated before the full impact of the banking crisis was felt in mid October. Nonetheless, falling consumer demand is not the whole of the picture. Although factory closures have certainly accelerated in recent weeks, they have been rising steadily for more than a year. Dongguan's Mayor, Li Yuquan, reported more than 400 factory closures in his city in the first six months of the year. Behind those closures lies a pattern of rising production costs and shrinking profit margins. As we have explained elsewhere, it was the boom in China's capitalism, the present cycle began in 2000, that generated those pressures. Huge investments in factories, raw materials and oil forced up prices while the need to employ relatively more skilled workers led to a significant rise in wages. Although competition for markets forced manufacturers to keep their prices as low as they could, resulting in wafer-thin profit margins, prices for finished goods, nonetheless, had to rise. It should not be forgotten that it was the importation of China's inflation, and the prospect of higher interest rates to combat it, that initially burst the "sub-prime mortgage bubble" in the US and unleashed the financial crisis and the credit crunch last year. Now, the credit crunch is having a huge impact on trade in general. Almost all trade is based on credit. No firm is going to ship goods halfway round the world without a dependable letter of credit from a dependable bank.

Equally, importing firms depend on the banks to issue letters of credit to give them time to sell off the goods they are importing. Thus, a freeze on credit automatically breaks up the long line of interlinked exchanges between the original producer and the final consumer. This is what is now taking its toll on China's export trade. It is not, however, the only dynamic that is having an impact on the Chinese economy. Although it can be useful analytically to consider the export trade separately from China's "domestic" economy, the two are not, in reality, entirely separate. The millions of workers who work in export industries, for example, live in huge cities built over the last two decades by Chinese workers using largely Chinese materials and they buy Chinese goods.

Similarly, the massive expansion in industrial capacity in recent years is a major factor in the "domestic" economy. The giant container ships are themselves an example of the relationship between the two sectors and what is happening to the shipping industry illustrates the more general problems affecting the Chinese economy as a whole. As the export trade boomed, so the demand for container ships and bulk carriers increased and China's shipyards worked at full capacity. By last year, the country accounted for almost 43% of the global market. The industry was so attractive that there are now 3000 private shipyards, compared to less than 400 ten years ago. In other words, China's capacity for shipbuilding has massively increased.

However, although the cost of a new ship is laid down in the initial contract to build it, construction is a relatively long process and the price of raw materials, such as steel, can rise. This is what has happened this year. The Asian Times quotes a report from the Macquarie Group that the price of steel jumped by 30% in the first six months of this year. At the same time, the growing evidence of a decline in global trade pointed to a looming crisis of overcapacity, too many ships for too few goods. As a result, 21 ships under construction in China's shipyards were cancelled between January and August. Overall, new construction is down 48% from last year. The credit crunch also plays a role in the crisis facing shipbuilding. Bloomberg reported that some $300 billion is needed to finance ships that have already been ordered for construction over the next three years, yet at least a quarter of these have not yet been financed. Nor is this only a question of "Western" banks avoiding risk in the aftermath of October's crisis. China's own Export-Import Bank, the largest provider of shipping finance, has reduced the percentage of construction costs that it will advance from 80% to 65%.

The cycle of rapid expansion of production and production facilities leading to rising prices and then overcapacity, a drop in orders and a rapid decline in production, is repeated in industry after industry and is by no means restricted to the "export trade". The effect of this can be judged by the impact it has had on world shipping costs. The Baltic Exchange Dry Index, which monitors international shipping rates for bulk goods such as coal and iron ore, has collapsed by 87% since May. This is accounted for by a sharp cutback in Chinese orders for these raw materials, indicating a major drop in production or, at least, a projected major drop, in heavy industry, a classic indicator of a cyclical downturn in the whole economy. The impact of the credit crunch that began in the US in August 2007, and the many linkages by which it has been transmitted into the Chinese economy, should by now have fully discredited the idea that the development of capitalism in China had allowed the country to "de-couple" from the major imperialist economies, the US, the EU and Japan. On the contrary, Chinese capital developed within the context of "globalisation" and was, indeed, an integral part of that system. It cannot now insulate itself from the effects of that system going into crisis. Even less accurate was the proposition that globalisation itself was dependent on imperialist exploitation of a great reservoir of cheap labour in China which would not be fully drained until approximately 2015.

On the basis of this theory, it has been argued that relatively steady economic growth on a global scale could be expected until that date. This "analysis" ignored two of the most important features of China's development, namely the source of capitalist investment in China and the inevitably cyclical nature of capitalist development. By far the greater part of capital invested in China did not come from the imperialist countries but from the overseas Chinese bourgeoisie based in Taiwan, Hong Kong and Southeast Asia and from within China itself. This capital certainly exploited Chinese labour, which was cheap by world standards, but the benefit to the imperialist states was primarily the supply of cheap goods and, as the trade expanded, Chinese purchase of US Treasury bonds and other investments, which helped to keep interest rates low. As to the supply of cheap labour, this is not, in itself, any guarantee of capitalist development, never mind a development without cyclical booms and slumps.

There was no shortage of cheap labour in the US in the early Thirties or in most of Africa at the moment. Even if we accept estimations that there are 200 million "surplus" people currently engaged in inefficient agriculture in China, that does not mean that they can be put to work profitably making cheap goods for the global market. As we have seen, China's economy has reached the peak of its current cycle, many factories are no longer profitable and we can expect their number to rise. New workers might be willing to work for low wages but they do not have the skills to replace the existing workers and, anyway, many companies are unable to pay any wages, they are closing altogether. Chinese capitalist development has reached the stage where it needs a recession in order to wipe out the least efficient capital. The availability of cheap labour, whether new from the countryside or previously unemployed in the cities, may become important when the process has taken its toll and a new cycle begins but the pattern of future development will depend on the outcome of class struggle within China and, no doubt, struggles between nations internationally. Meanwhile, the course of the international economic crisis will inevitably be affected by the consequences of the cyclical downturn in China, something whose effects are yet to be seen.