China’s fiscal stimulus was smaller than the United States’ – 4.8% of GDP versus 5.9% – but yesterday we got confirmation that it has worked much, much better.
China’s economy grew by a stunning 7.9% in the June quarter; America is mired in recession, with GDP running at an annual rate of minus 0.4%. Yesterday we learned that US capacity utilisation is the lowest in history and that the inflation rate is the lowest in 59 years.
What’s the difference? Karl Marx, Communist Party spin and, above all, credit.
The Chinese GDP figure is a guess. The various provincial record-keepers send in their guesses of local output as soon as each quarter ends. According to Adam Matthews of JP Morgan, if national growth were calculated purely on the basis of those figures, it would be much higher than 7.9%. The local party chiefs all want to impress Beijing with how well they are going.
So China’s central authorities adjust downwards what they get from the provinces for sycophantic spin. In other words, they make a guess based on guesses. As most economists acknowledge, it is more art than science.
Anyway, 7.9% is the number. It might really be more, or less, but that doesn’t matter, “socialism with Chinese characteristics” is working.
Karl Marx didn’t have much to say about the role of government. In fact, his failure to develop cogent theories around proper governance, to go with his wild but (then) attractive ideas about labour and capital, was Marx’s greatest failure, and led directly to the shocking excesses of all subsequent proletarian dictatorships, including Mao Zedong’s Cultural Revolution.
It took Zhou Enlai’s ‘Four Modernisations’ of 1975, covering agriculture, industry, technology and defense, to transform the role of the state in a Marxist economy. In 1978 Deng Xiaoping got control of the Communist Party and launched the four modernisations as official party policy, declaring: “Socialism does not mean shared poverty”.
Since then China has created an incredibly successful combination of market economy and Marxism-Leninism – whatever we might think of its disgusting behaviour towards dissidents and, lately, commercial competitors (Stern Hu and Rio Tinto).
The Four Modernisations and Deng’s subsequent ideas transformed the Chinese economy into the most powerful exporting nation in history, but its performance in 2009 – in the face of a collapse in global trade following the financial meltdown of last September/October – is, to some extent at least, a triumph for socialism and the discredited ideas of Karl Marx, rather than the market economy.
One wouldn’t want to take this thought too far, but the stimulus packages of China and the United States have been very similar in both size and intent – it’s just that one has been better targeted and has therefore worked better.
According to the Brookings Institution, China’s spending in 2009 so far has been $US90.1 billion, or 2.1% of GDP, compared to $US268 billion in the US, or 1.9% of GDP.
A big difference has been that 44% of the stimulus has been in the form of tax cuts, while none of China’s has.
Total size of stimulus, according to Brookings, is $US841.2 billion for the US (5.9% of GDP) and $US204.3 billion for China (4.8% of GDP).
Both countries have poured huge amounts of money into spending on roads and infrastructure, and both have deliberately and massively expanded money supply.
The difference is state control. In China, the money for infrastructure has been distributed to state-owned companies, which have spent it all on hiring workers. In the US, companies have been more careful about hiring and more concerned with repairing their balance sheets first.
More importantly, state-owned banks have been lending money hand over fist. Unlike in the US, there has been a credit boom, caused by Beijing directly instructing its banks to lend.
Credit is up 200% in the first half of 2009 to more than $US1 trillion, resulting in a 33.6% boom in fixed asset investment in June and a 10.7% increase in industrial production, according to figures out yesterday.
Bank lending now accounts for a staggering 19% of Chinese GDP. M2 money supply growth is now running at 19%.
In the developed world, credit growth is entirely moribund and OECD M2 growth is running at 7.5%.
The downside is that a bubble is developing in both shares and property: the Shanghai stock market is up 75% this year, and must surely be heading for a destabilising crash.
And then there is Karl Marx’s view of the matter, from Chapter 25, of Volume 1 of Das Kapital: “With capitalist production an altogether new force comes into play – the credit system, which in its first stages furtively creeps in as the humble assistant of accumulations, drawing into the hands of individual or associated capitalists, by invisible threads, the money resources which lie scattered over the surface of society, in larger or smaller amounts; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the centralisation of capitals.”
No, I don’t know what he meant either.
This article first appeared on Business Spectator.
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