The Spark

the Voice of
The Communist League of Revolutionary Workers–Internationalist

“The emancipation of the working class will only be achieved by the working class itself.”
— Karl Marx

Chinese Capitalism:
Facing Its Own Contradictions and Facing Imperialism

Jan 8, 2024

The following article was translated from an article appearing in Lutte de Classe #237, February 2024, the political journal of the comrades of Lutte Ouvrière, the French Trotskyist organization.

Since the Covid crisis at the end of 2019, the Chinese economy has been facing a number of difficulties from which it seems unable to extricate itself. But this crisis is neither specifically Chinese nor purely cyclical. Over the past 30 years, China has become deeply integrated into the global economy under the direction of its state. In the 1990s and 2000s, Western companies turned China into the workshop of the world, finding there the human resources they needed to restore their profitability. After the 2008 crisis, soaring property speculation in China rekindled Western interest in this vast market. Today, Chinese capitalism is confronted not only by the downturn in the global capitalist economy, but also by the limits imposed by the imperialist powers, causing China a host of difficulties which, if they persist, will have consequences for the course of the world.

In its October 2023 publication, the IMF noted that the global economy was struggling. Analyzing the consequences of the pandemic, the war in Ukraine and increased geo-economic fragmentation, it predicted that global growth would slow further. Its conclusions were clear: “Medium-term global growth forecasts, at 3.1%, are the lowest for several decades, and the prospects of countries catching up with the standard of living of other more advanced countries are dim.” While hundreds of millions of human beings around the world remain or plunge into destitution and precariousness, and others die under bombs, the masterminds of capitalism no longer dare even to promise a better future. It’s their admission of bankruptcy, the bankruptcy of an economy based on the market and the anarchy of competition.

In the early 2000s, China’s growth, driven by government policies and Western investment, pulled the entire global economy behind it. Between the early 2000s and the early 2010s, China announced growth rates higher than 10%, even reaching 14% in 2007, before the great crisis of 2008. Some saw this as the miraculous effect of capitalism, others as the catch-up effect of a country emerging from poverty. In fact, the Chinese state and Western capitalists had only found common ground, enabling them to jointly exploit the Chinese working class, which contributed to the profits of the Western bourgeoisie and led to the emergence, or re-emergence, of a sizeable Chinese bourgeoisie and petty bourgeoisie, under the aegis of the Chinese state. Cities sprang up around the free trade zones and the SEZs (Special Economic Zones), which organize the exploitation of the Chinese working class. But China is far from coming out of poverty. According to the World Bank, 19% of its population still lives below the poverty line, with 273 million people earning less than $6.85 a day. The most modern and affluent urban areas, around Beijing, Shanghai, Shenzhen and the provincial capitals, still rub shoulders with the backward countryside. Hundreds of millions of migrant workers, like second-class citizens, come from the hinterland to earn the equivalent of a few hundred dollars under the harshest conditions, only to be sent back when the interests of Chinese and foreign capitalists turn around.

The Real Estate Crisis

The years following the 2008 global crisis saw a further unbridled real estate speculation. The Chinese state, the resurgent Chinese bourgeoisie and local officials found a way to boost manufacturing activity in the wake of the slump in Western countries. To finance their construction projects, developers and provincial governments ran up endless debts, using the money from credits granted to new projects to continue work on old ones. The system worked as long as the market was expanding and prices were rising, creating a real estate bubble, which, however, began to deflate more than two years ago. As a result of the market downturn at the time of the pandemic, many developers found themselves unable to repay their creditors and finish building. The speculation machine ground to a halt and, contrary to government hopes, it has not restarted.

The surface area under construction peaked in 2019. By 2021, it had begun to fall, before collapsing by 40% in 2022. In November 2023, it was down another 15% from 2022, reaching less than half of what it had been at the end of 2019. Real estate sales followed the same trajectory. According to Nomura Bank, developers in China have so far delivered only around 60% of the homes pre-sold between 2013 and 2020, with many construction sites on hold. Between the collapse in housing starts and these suspensions, developers have in fact drastically reduced production. They are trying to sell off their stocks at relatively high prices. And, in fact, property prices did not begin to collapse until 2023. In the newly built sector, they fell by only 3% in 2023. While many migrant construction workers have been thrown out of work and forced to return to their hometowns or villages, the central government is doing what it can to support developers: it is making buyers who are already homeowners eligible for subsidies reserved for first-time buyers, it is keeping interest rates very low, and it is rescuing provinces unable to repay their property debts.

But the real estate crisis is far from over. It began when Evergrande, the industry leader, found itself unable to repay its creditors, more than two years ago. The group is still between liquidation and restructuring, unable to meet the terms of its colossal debt of 328 billion dollars, leaving workers and subcontractors stranded, as well as its customers for whom the purchase of an apartment is the investment of all their savings and their old-age insurance, provoking anger and demonstrations. Evergrande’s setbacks, its payment defaults, the arrests of its executives and the house arrest of its manager, a former billionaire and former protégé of Beijing’s power, have made international headlines. But the majority of real estate developers are experiencing the same difficulties. Just one example: Country Garden, which became the biggest property developer after the collapse of Evergrande, also found itself unable to meet its debts in the summer of 2023, and again in October. Its sales fell in October and November to one-sixth of their average for 2021 and 2022, as customers showed little confidence in the company’s ability to deliver.

In China, unlike in the imperialist countries, the state dominates the bourgeoisie, not the other way around. Many of the big bosses who made their fortunes under the protection of the state and whose companies plunged into crisis have literally disappeared or been arrested. The Chinese state also intervenes by supporting these companies through its many state-owned enterprises (SOEs) and banks. By limiting liquidations as much as possible, the Chinese state aims to safeguard the interests of the capitalists, mainly Chinese but also Western, who invested in the development companies or lent to them. For example, Gemdale Corp, China’s tenth-largest developer, which is due to repay 1.4 billion dollars over the next four months, has received state support through several state-owned banks, which said they are prepared to lend it one billion if Gemdale offers them an iconic Beijing shopping mall and office complex as collateral. Another, Vanke, saw its main shareholder, a state-owned company, put the equivalent of over a billion dollars on the table so Vanke could honor its debts.

However, the crisis has also spread to finance, and in particular to the so-called shadow finance, i.e., private funds that intervene in the economy without belonging to traditional banking circuits, and whose importance grew considerably with the real estate speculation of the 2010s. In July, signs of trouble emerged at Zhongzhi Enterprise Group, one of China’s leading asset managers, when one of its subsidiaries defaulted on payments for dozens of investment products. In mid-September, two state-owned companies took control of this subsidiary, but at the end of November, Zhongzhi, the parent company which manages 128 billion dollars of customer assets, declared itself “seriously insolvent” due to 60 billion in debts. On Friday, January 5, it declared that it “manifestly” did not have the capacity to repay its debts, promising serious losses to its wealthy clients and provoking, in the words of Les Echos, “one of the biggest bankruptcies in the history” of China. Zhongzhi’s liquidity crisis had in fact existed for several years, but its subsidiaries were able to cover it by using advances from new customers to pay interest on investments and repayments owed to old ones. With the slowdown in the Chinese economy and the plunge in real estate, such financial manipulations have become increasingly difficult and risky.

Western capitalists are worried about the future of Chinese real estate. Real estate accounts for between 25% and 30% of the Chinese economy. Classifying it as a “factor affecting global growth,” the IMF states that the crisis in China’s real estate sector “could worsen and have global repercussions, particularly on commodity-exporting countries.” According to the IMF, the real estate threat does not weigh so directly on the industrialized countries, the U.S. or Europe, as on the commodity suppliers who profited during the 2010s from speculation in Chinese real estate. Major exporters of hydrocarbons, oil, gas, coal, iron and other raw materials to China, mainly African and Australian countries, have seen their order volumes fall.

However, another consequence of the real estate speculation of the 2010s is China’s colossal debt. In relation to the volume of the country’s annual output, total public and private debt is roughly on a par with that of the United States, but China doesn’t have the power to print money at will, as the United States does with the dollar. In fact, China leads the international rankings when it comes to the debt of private non-financial companies, with an estimated 28% of the world’s total. It remains difficult to estimate the international damage that would be caused by a collapse of real estate developers and the finance that supports them.

The Chinese Working Class in the Face of the Global Crisis

If China’s crisis has national roots, it is aggravated by the global slowdown since the end of the pandemic, the war in Ukraine, and the economic war waged by the United States against a power it now considers to be its strategic competitor.

Because China remains the world’s leading workshop, these factors have a direct impact on its business. As a sign of this, both exports and imports have been falling over the past year. Since 2017, American sanctions have multiplied. These include tariffs on thousands of Chinese products, bans on high-tech exports to China, and bans on imports of certain equipment that competes with American products, such as those destined for 5G. Geopolitical tensions have also prompted American importers to secure their supplies by finding other supplier countries, so as not to depend solely on China. Due to the global crisis and the war in Ukraine, while total U.S. imports from all over the world have fallen by 5%, those from China have dropped by 30%, down to the level of 2013 and 2014. This means that American importers of manufactured goods have diversified their sources of supply. Thus, while imports from China accounted for 19% of U.S. imports at the start of 2022, by the third quarter of 2023 they represented just 14%, a decline that has benefitted mainly Mexico and countries in the European Union.

The United States remains China’s biggest customer, still accounting for 17% of its exports, followed by Hong Kong (8.5%), Japan (4.9%), South Korea and Vietnam (between 4 and 5% each). Some of China’s exports involve parts that are finally assembled elsewhere before being sold to the U.S. and Europe, thus escaping punitive customs duties. This is undoubtedly the case for a large proportion of its exports that go through Hong Kong and Vietnam. Nevertheless, overall, Chinese exports, after reaching a record high at the end of 2021, recorded their first downturn since 2016, a loss of around 150 billion dollars, attributable to exports to the U.S. and ASEAN countries. Only exports to war-torn Russia are growing.

These trends indicate a decline in manufacturing activity, and hold consequences for the Chinese working class. The China Labour Bulletin (CLB), published online from Hong Kong by the CLB association, reports on disputes between Chinese workers and their Chinese or foreign bosses. The CLB estimated that the number of labor protests and strikes has at least doubled in the first part of 2023, compared to 2022, a year in which such protests were much reduced due to prolonged confinement. Since the beginning of 2023, workers reacted, albeit still defensively, over unpaid wages, layoffs and factory closures, the consequences of reduced international orders and a struggling domestic economy. These protests are concentrated in the manufacturing of electronics, textiles, toys and the automotive sector. Faced with a sluggish market or the need to reorganize their industrial sites, many companies have reduced working hours, depriving employees of the overtime that is the only way to earn a living wage. The aim is often to get workers to leave voluntarily, so that companies can write off their redundancy pay before the plant closes. Many companies have closed on the sly, failing to pay wages owed and/or statutory compensation, moving machines on weekends or during vacations. In all cases, collective action has come up against the passivity or even complicity of local authorities, who ask workers to make do with the little the company leaves them. In the construction industry, many workers have not been paid for months. CLB reports on the social networks of a migrant worker in Shaanxi province: he and his colleagues have been without pay since 2021, after working on a hydroelectric installation project run by property developer Country Garden.

The number of incidents in which police were dispatched to strike and demonstration sites rose proportionately, to almost double those recorded the previous year. The state and the official trade unions are both defending the interests of Chinese and foreign capitalists, to make the workers accept their fate.

The Consequences of Reorganizing Production Lines

The real estate and industrial crises underway in China reflect a situation of capitalist overproduction, with a production apparatus whose capacities exceed what the market is capable of absorbing. The immediate consequences of this crisis are likely to be a worsening of overproduction. Chinese consumption can only be cut back by the record number of unemployed workers, and by the people who have to continue paying rent because work on the home they have bought, and on which they are paying installments, has been suspended. The downturn in domestic consumption can be measured by the receipts from consumption taxes, corporate income taxes and customs duties on imports, which the government has announced are down by 7 to 12% since the start of the year; and by the trend toward deflation, the fall in the price of goods, which has been perceptible in recent months.

Figures put forward by the government show that private investment continues to contract, and that it is only thanks to public investment that total investment continues to grow, albeit at a slower pace. Since 2022, this investment has been reduced by the decline in foreign investment. “The time of the Chinese Eldorado seems far away,” wrote Les Échos on September 19. According to the latest figures published by the State Administration of Foreign Exchange (SAFE), a Chinese organism, the balance of inward investment in China (the difference between the sums foreign companies invest in China and those they take out) was even negative in the third quarter of 2023. It stood at minus 12 billion dollars, its lowest level since 1998, due to the repatriation of profits made by foreign companies established in China, particularly American companies—to the detriment of reinvestment in China. This is a manifestation of the capitalists’ awareness of rising geopolitical tensions and the fact that U.S. companies are seeking to diversify their supply chains. In the words of one specialist, “foreign firms operating in China are not only declining to reinvest their earnings but—for the first time ever—they are large net sellers of their existing investments to Chinese companies and repatriating the funds. These outflows exceeded $100 billion in the first three quarters of 2023 and are likely to grow further based on trends to date.” 1

Increased protectionist measures in Europe will also exacerbate the crisis in China. The European Commission has launched an anti-subsidy investigation against Chinese automakers, whose electric vehicle prices are 25% lower than those of their European competitors. The main aim is to justify higher taxes on imports of Chinese electric vehicles, which are taxed at a rate of only 10% in Europe, compared with 27.5% in the United States. Automobiles are China’s main growth sector, but it’s a highly competitive one, with several players engaged in a trade war. Protectionist measures against Chinese manufacturers are likely to slow down the export of their vehicles, prompting them to find countermeasures. According to the press, to get around the tariffs, several Chinese automakers are planning to set up production plants in Mexico or Europe, for batteries, engines and even vehicle assembly. Such moves would undoubtedly aggravate tensions with Western corporations and their governments. Automobiles are not the only sector targeted by protectionist measures, as Europe prepares to copy the United States in “critical and strategic technologies”: artificial intelligence, quantum technologies, advanced semiconductors and biotechnologies.

The Chinese state is responding to Western protectionism with its own protectionist measures, but it is not in the same position. Certainly, China, which extracts 58% of the world’s production and refines 89% of the rare earths essential to batteries and electronics, has just banned the export of the technologies used to exploit them. When Huawei released a new high-end smartphone, Chinese government agencies and companies ordered their employees not to use Apple iPhones and other foreign-branded devices for business purposes. Apple generates 19% of its worldwide sales in China, but despite this, China overall is in a subordinate position in the global economy. The United States can change suppliers, Europe can create regional players. China is hardly in a position to change its customers. It can help its own capitalists to reorganize their production chain, by having final assembly carried out in Vietnam or India, to get around the punitive tariffs imposed by the United States. It can also try to sell off its goods, such as automobiles, by waging a trade war, lowering their prices on the world market in proportion to the rise in customs duties, as Les Échos summarized on September 23: “Local manufacturers, struggling at home, more aggressive on our markets.” Imperialist countries can respond with prohibitive taxes, or even more simply by banning Chinese products, as was the case with Huawei’s 5G technology equipment.

This commercial war is hurting the interests of a number of Western capitalists. As the U.S. prepares new restrictions on semiconductors from or to China, Gina Raimondo, U.S. Secretary of Commerce, responded to some critics: “I know there are CEOs of chip companies in this audience who were a little cranky with me when I did that, because you’re losing revenue. Such is life, protecting our national security matters more than short-term revenue.”

The Chinese economy is therefore under pressure from the imperialist powers. This explains Xi Jinping’s attitude in recent months toward the United States in particular. On Wednesday, November 15, Xi Jinping and Joe Biden met in San Francisco, California, on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit. As this was the first meeting between the two countries in a year, against a backdrop of high tensions, the press saw it as a thaw in relations between the two countries. If there is a thaw, it is in fact a very relative one. Questioned after the meeting, Joe Biden referred to Xi Jinping as a “dictator” in front of an appalled Anthony Blinken. This did not prevent the Chinese government from congratulating itself on renewing dialogue with the United States, nor from hailing “a new beginning in Sino-American relations.” In China itself, the government’s tone toward the United States, hitherto martial and warlike, has changed dramatically. The People’s Daily wrote: “No matter how the situation develops, the historical logic of peaceful coexistence between China and the United States will not change.” Time will tell how long this evolution in Chinese discourse will last. Today, Chinese capitalism is in a delicate position, and its leaders are making demonstrations. The highlight of the APEC summit was undoubtedly the gala dinner presided over by Xi Jinping after his meeting with Biden, attended by 300 top American businessmen who paid up to $40,000 to dine with him, and whom Xi Jinping sought to convince to return to invest in China.

It’s hard to foresee how the Chinese state will react in the long term to this growing pressure from imperialism. The fact that the economy is under duress may aggravate the Chinese capitalists’ struggle against the workers, and the loss of foreign markets may increase their economic and political aggressiveness. Neighboring Vietnam, the object of U.S. attention, may become the focus of these rivalries. In any case, the United States is preparing for all possible outcomes. This summer, Biden, after declaring that China’s economy is a “ticking time bomb,” one that the U.S. has helped to create, added that “when bad people have problems, they do bad things,” justifying the military aggressiveness of U.S. imperialism toward its Chinese competitor, against whom it is preparing for war.

1 Foreign direct investment is exiting China, new data show