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China..A letter to Jorge Martin

posted 24 Jun 2011, 05:59 by heiko khoo   [ updated 27 Jun 2011, 06:03 by Admin uk ]

A discussion on the facebook wall of Jorge Martin prompts us to make this letter public.   

A letter to Jorge Martin. by Jonathan Clyne  

The following is a letter I sent to Jorge Martin (Jordi) about his article Negative economic indicators pile up as China is hit by global capitalist crisis published on Friday, 12 December 2008 at‐hit‐by‐global‐capitalist‐crisis.htm  

It shows that whatever excuses he might be making today about 'the delay of the crisis', his method was wrong then, as it is today. He never replied to my letter.


Dear Jordi,


I was disappointed when I read your latest article on and saw that you quote statistics in a misleading way in order to try and prove that capitalism has, after a long gradual change, been established in China. You focus on the small picture, losing sight of the big picture. Let me give you some examples.


1. You write that “The Economist is forced to admit that China's dreadful trade figures’ are a ‘blow to the world economy‘. These figures, they say, are particularly shocking because China's racing trade has been an engine of world trade, and thus global growth.’”


If you are going to quote this week‘s Economist you should not just quote what they are writing about their feelings on one month‘s trade and FDI figures, but also what they write in another articles about the facts about domestic consumption in China. “Chinese manufacturers are well aware that they operate in one of the few large markets that is still showing a pulse. Retail sales in October were up by 22% compared with the same month in 2007—a slight drop from 23.2% in September, but an impressive figure nonetheless. That certainly exaggerates the country‘s economic vigour (growth in car sales, for example, is declining), but it would be a stretch to believe that China is in recession.The article chronicles how falling world demand is causing Chinese export manufactures to find all kinds of ingenious ways to re‐route their goods to a booming domestic market.


2. You should not lose sight of another fact. Sudden drops in exports are nothing new for China. The same thing happened as part of the crisis in East Asia, and the world recession of 2001‐2003. Since China opened itself up to the world market it has never been in doubt that it would be, and has been, affected by a world financial crisis and recession. But the fact is that the massive increase in investments that the Chinese bureaucracy implemented in the past when trade suddenly dropped had the desired effect – China‘s growth was maintained after the initial trade shock.


As Alan likes to point out, nobody can foresee the exact date of any capitalist crisis and it is a bit of a tall order that the Chinese bureaucracy should be able to take measures against a deep recession outside of China before it has happened. What is remarkable about China is not that its trade has finally been hit by the world recession, but that in the past year China‘s trade has held up extraordinarily well. This has been a year in which world trade has been squeezed substantially.


The main point is that there is no general crisis of overproduction in China. In the main, the problems are imported and are being dealt with. And even if some, or even a large part of the gigantic stimulus package is not new’ investments, but investment plans brought forward, that is completely irrelevant. The effect is the same. It will deal with the current crisis.


3. You should not get carried away by the figure of China‘s exports being 40% of its GDP. (Still that has at least some basis in reality compared to the 50% figure that Fred likes to mention. I have no idea what his source is for that). This does not mean that 40% of everything produced in China is exported. Only about 10% of everything produced in China is exported, which is substantial, but not decisive. The 40% figure is based on a simple way of comparing the trade dependency of different nations. It is not an analysis of the actual export content of a countries production. Again see another article in the Economist. It is called An old Chinese myth (


Between 2005 and 2007, net exports contributed only two to three percentage points to the increase in GDP, whereas domestic consumption added eight to nine percentage points. The latest figures show exports to be even less significant. ( So, even in the unlikely event that exports entirely disappear, China would still have an extraordinary high growth rate.


Of course, because of the opening to the market there are some bubbly elements in the economy.

Nobody is claiming that there is no capitalist mode of production whatsoever in China. All I point out that it is not the dominating mode of production. You mention a housing bubble and give a few statistics to show falling prices. You do not mention that ―a fall in house prices will hurt Chinese consumers much less than their American counterparts, because Chinese households are not up to their necks in debt. Total household debt (including mortgages) amounts to only 13% of GDP, against 100% in America. During America‘s boom, it was easy to get a mortgage for 100% or more of the value of a home, but Chinese buyers have had to put down a minimum deposit of 30%.ǁ (


The basic problem with your article is its starting point – the idea that you can gradually and peacefully move from a deformed workers state to capitalism. This leads you into only seeing the small picture. You will always find some facts for your concept, as you will for almost any concept under the sun, but you will never get the big picture. That one will only get by basing oneself on tried and tested Marxist concepts and perspectives. Trying to push China into the capitalist mold you also end up with some strange bits of economic analysis.


1. You write that “it is not even clear that a devaluation of the yuan would help boost Chinese exports. Her neighbour South Korea has seen a devaluation of around 30% of her currency and still South Korean exports collapsed by 18% in November. Even if your products are cheaper, they are not going to be sold if there is no one out there to buy them!" Now, it is perfectly true that devaluation is not a very effective way of boosting exports. But that is not because there is ― "no one out there to buy them!" A completely absurd statement. Obviously the entire population of the world has not suddenly overnight stopped consuming commodities.

Devaluation is not a very effective means of increasing exports, because while it cheapens exports it also increases the price of imports and so, in an economy where a large part of the exports have an import content, it does not really make much difference. Neither the German nor the Japanese nor for that matter the Chinese export miracle were based on devaluations, on the contrary their currencies were continuously revalued. The miracles were based on increased productivity, due to much larger investments than their competitors. (The reason for keeping the Renminbi slightly undervalued has been at least as much in order to keep imports out and develop manufacturing in China, than to encourage exports). In past recessions China has gained market shares, probably at a faster rate than during booms. There is no reason to presume that the same thing will not happen now, not because of any devaluation, but because of the investment plan. There are still plenty of consumers out there who will buy Chinese goods, if the price is right.


2. You write “The Chinese have one of the highest rates of savings anywhere in the world, and the thinking is that if they can get them to spend that money, then the economy will be boosted by its internal market. However, the main reason for these high rates of savings is the fact that the capitalist reforms destroyed or scaled‐back the Iron Rice Bowl system of life‐long secure employment and social welfare programmes that existed in the past. Now, the average Chinese household has to pay for a large part of their health, education, pension and other related costs. They are saving because they are terrified of getting sick, losing their jobs, getting old, and need to pay for part their children's education costs.This analysis is doubly wrong.


Firstly, the thinking is not at all if they can get them to spend that money, then the economy will be boosted by its internal market. It is only a small part of the Chinese government plan to directly put more money into people‘s pockets. The main part consists of investments and improving health and education.

Secondly, you seem to have a rather quaint view of savings, as if savings are treasures collected in a cave or at least in a bank vault, and if you give people more money it will simply be hidden away too. In fact, it is an elementary axiom of economics that savings = investments. The more people save the more is available for investments, unless the savings are literally put away in a cave or hidden in a mattress. Under capitalism, when people are heavily indebted, the axiom is not entirely true, because when economists talk about increased savings in times of crisis what they are really talking about is the tendency for people to try and reduce their debt. But the Chinese people do not tuck away their savings and do not have many debts. They put them in state banks, where they are safe and earn a relatively high rate of interest. The state then uses this money to pump it into the SOEs, thereby increasing their productivity and their ability to compete in the world market. The more that is saved, in China, the greater will investments be.


3. You write that “the average Chinese household has to pay for a large part of their health, education, pension and other related costs. They are saving because they are terrified of getting sick, losing their jobs, getting old, and need to pay for part their children's education costs. If you add to this the effects of rapidly falling house prices which will hit the urban middle classes, and the risk of rising unemployment, the real impact of any Keynesian stimulus plan is likely to be limited.On the one hand you make a logical mistake. In effect, you say that the effect of taking measures to reduce unemployment will be limited because there is – unemployment! On the other hand (if we ignore the problem of falling housing prices which does not occur in every recession), you are in practice saying that the effects of Keynesianism would not be limited in China if the state simultaneously extends the welfare system to encourage spending by the masses. Thus, the Chinese capitalist state has the means at hand for capitalism to overcome a capitalist crisis, if the effect is 'limited' it is because of a policy error ‐ 'insufficient welfare'. A pure reformist position. Which is entirely different from my position that Keynesianism does not work under capitalism because the state does not own the commanding heights of the economy.


Anyway, I will leave things at that, at this stage. I am very much looking forward to discussing the whole issue when the international bulletin is published, and at the IEC next summer.