As the US, Japan and Europe slide into recession, the leaders of many smaller countries are desperately hoping that continued strong growth in the Chinese economy, which has contributed about 15 per cent of world economic growth in recent years, might save them from this meltdown.

There’s hope and then there’s hard facts. Recently the latter has replaced those desperate hopes with terror. A measure of this was the November 4 decision of Australia’s Reserve Bank to make a bigger than expected interest rate cut. Any temptation by holders of large mortgages and other debts in Australia to reach for the champagne was killed by the realisation that this decision, in the words of one business correspondent, “was a recognition by Australia’s top policymakers that the Chinese economy is no longer providing a firewall to insulate the Australian economy from the international crisis”.

Underlining these fears, the world’s biggest mining companies are publicly reassessing their investment plans and entering a price war. As Jamie Freed reported in the business pages of the Age and Sydney Morning Herald on November 4:

“Amid a rapidly deteriorating market for iron ore, Australian miners face the unappealing prospect of a 40% fall in the benchmark price next year and the curtailment of both existing production and growth plans.”The spot price of iron ore, Australia’s second-biggest export earner, has fallen to about $US60, compared with the benchmark price of $US100 set in July.
“Brazil’s Vale on Friday said it would slash its annual production by 30 million tonnes... Rio Tinto railed a record amount of iron ore to its ports in October but it had not ruled out the possibility of production cuts.”BHP Billiton plans to maintain production, but its board is poised to decide this month whether to proceed with a $US6.1 billion iron ore growth project in the Pilbara to increase its annual output to 200 million tonnes a year."

Reporting the beginnings of a price war, Freed reported on November 5 that Vale CEO Roger Agnelli, had accused Rio of selling iron ore to Asian customers at the record benchmark price but agreeing to cover freight costs in recent weeks.

Glenda Korpooral, wrote in the November 05, 2008, The Australian:

“The real shock has been how rapidly the situation in China has changed in the past few months, leading to the sharp fall in the world price of commodities such as iron ore and coal.”Australians have been seduced by China’s high economic growth figures of 10 and 11 per cent-plus annually.

“The latest growth figures for China, at 9 per cent, still appear strong by world standards, but the real economic drivers are always the marginal, rather than absolute, numbers.”

China’s National Bureau of Statistics (NBS) explained in a report released on October 20 that the country’s economic growth rate had slipped into single digits in the third quarter for the first time in at least four years under the impact of the global credit crisis and weakness in the domestic property sector. Annual gross domestic product growth slowed more sharply than expected to 9.0 per cent from 10.1 per cent in the second quarter.

 Manufacturing slowdown

China’s manufacturing slowdown is accelerating, according to a November 3 post in China Economy Watch:

“China’s manufacturing contracted by the most on record last month as the global financial crisis cut demand for exports, a second survey showed. The CLSA China Purchasing Managers’ Index fell to a seasonally adjusted 45.2 in October from 47.7 in September. The output index fell to 43.4 in October from 46.7 in September, while the index of new orders declined to 43.8 from 45.8. The index of export orders dropped to 44.3 from 45.9.”The government-backed China Federation of Logistics purchasing managers’ index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September.

“Basically, not only does Chinese manufacturing seem to have been in contraction mode for the last several months now, the rate of contraction seems to be accelerating.”

A month before this same blog had warned that steel-product output in China, the world’s biggest producer and user of the alloy, fell 5.5 percent in September from a year ago to a seven-month low as weak demand and falling prices forced mills to pare production.

China’s National Bureau of Statistics (NBS) explained:

“China’s crude steel output fell to 39.6 million tonnes, down 7% from August and 9.1% year-on-year, indicating that many northern mills were cutting production, said market sources. China’s steel production ban for the Olympics lasted from July to September 20, so a fall in September output meant that mills were not only not resuming production, but reducing it further in the face of weak demand, said the sources. Several mills in Hebei, China’s biggest crude steelmaking province, have been cutting output or have even closed down due to sluggish demand. Some were dumping products in the market in return for cash. September output for major finished products like rebar and plate rose, however, inched up in the month but analysts said this may be due to lower crude steel exports in the month. China exported 7.31 million tonnes of crude steel in September, 1.42 million tonnes or 13.5% less...”

The China Economy Watch blog reported:

"Industrial production slowed to 11.4 per cent in the year to September, the lowest rate since 2002, suggesting that the economy was losing momentum as the quarter went on. However, the pace of retail sales and fixed-asset investment growth both accelerated last month, beating forecasts and providing reassurance to policy makers counting on domestic demand to take up the slack from ebbing exports.

Speculative bubbles

“The property market, which accounts for about a quarter of fixed-asset investment, is in almost in free fall due to tight credit and government curbs. Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, the official Xinhua News Agency reported, citing the China Real Estate Association. This decline is really still to show its ugly face in the data though, since urban fixed-asset investment climbed 27.6 percent in the first nine months from a year earlier, after a 27.4 percent increase through August...”

The Australian’s Glenda Korporal noted:

“Even before the world financial crisis hit, Chinese authorities were carefully using higher interest rates and measures to cut bank lending to slow the Chinese economy and cool what they saw as speculative bubbles in both property and the share market.”These measures, plus slowing demand, particularly from the US and Europe, and rising Chinese prices of production, which have led manufacturers to move production to cheaper areas such as Vietnam, were already cooling the economy before August."

 Massive job losses

The slowdown in industrial production in China was explained by some pundits to be a result of the closing of factories in Beijing ahead of the Games but the real picture was much more serious.

“Southern China, the export-orientated region that led China’s economic revival, is now suffering.”Estimates are that several million factory workers could lose their jobs in Guangdong province, as the slowdown has cuts demand for consumer products such as toys, clothing and electronics.

“Smart Union, a toy manufacturer in Dongguan, across the border from Hong Kong, closed last month, leaving 7000 workers out of a job and owed several weeks back-pay.”Federation of Hong Kong Industries chairman Clement Chan estimates that a quarter of the 70,000 Hong-Kong-owned companies in southern China — almost 18,000 businesses — could close by the end of January.

“The next few months could be particularly grim as factories close ahead of Chinese New Year — some forever.”

Reporting on the Smart Union closure, the International Herald Tribune described this as “the latest example of the difficulties facing the Chinese toy industry as it struggles to cope with falling exports”.

Factories in the once-booming province of Guangdong have suffered over the past year and a half from tight curbs on loans, rising labour costs and a stronger yuan, which makes Chinese products more expensive on global markets, the IHT report explained.

Smart Union Group, one of the largest toymakers in the region and a supplier to Mattel, said that it would wind up operations and that provisional liquidators had been appointed. The company had tried to beat the downturn by taking on more orders as smaller factories closed, local news media reported. But that meant it overextended while demand worsened, a result of the global credit crisis that is threatening to drag the economies of wealthy countries in the West, among China’s best customers, into recession.

“The main reason for the closure is that we are too dependent on the U.S. market, which has become sluggish,” said Xu Xiaofeng, a human resources executive at Smart Union, quoted in China Daily newspaper. Smart Union had not paid its 6,500 employees in the city of Dongguan for two months, the newspaper said.

“I feel very agitated. I have waited for a few days now, we need money to pay for our housing and food,” said a worker, Huang Luohui, 33, who said the company owed him two months of wages.

“Some people say the company has folded and that the boss has fled,” Huang added. “The government said they’d resolve the problem in three days. Today is the third day and we’ve seen no reply from them.”

Riot police officers with batons and shields stood in front of the factory gates, where a notice read that “because business is bad, we are unable to give you your salaries.”

In an October 23 article, Vincent Kolo of chinaworker.info described the impact of the global capitalist crisis on Guangdong as a “super-typhoon”.

“A domino effect of factory closures is rippling through industries such as toys, footwear, textiles and light engineering in Dongguan, Shenzhen, and other heavily industrialised cities in the Pearl River Delta. The Federation of Hong Kong Industries (whose members run their production from the delta) warns of 2.5 million job losses in the coming three months – 27,000 every single day! The same source said 20,000 Hong Kong-owned small and medium-sized enterprises could close down by the Lunar New Year (January 2009)...”Thousands of workers have lost their jobs and many have taken to the streets to demand unpaid wages. Their former bosses in many cases have spirited away valuable assets and disappeared. Street protests and demonstrations at local government offices have been a daily occurrence in many townships in the region. In at least one case in Shenzhen, at the Xixian factory linked to luxury watch retailer Peace Mark, also Hong Kong-owned, more than 600 workers staged a sit-in for two days to demand their wages. More such protests are on the cards in coming weeks and months.

“Exporting regions like the Pearl River Delta are the first to be hit by the crisis, as their export markets wither under the impact of the global recession, while input costs have risen, and bank credit has become tighter. This is just the first phase of what is clearly a significant industrial slowdown in China, exacerbated by the simultaneous bursting of gigantic financial bubbles in the Chinese stock market and property sector. Added to this there is of course the global capitalist crisis, which is hammering export markets and threatens new financial upheavals. Asian stock markets sank to four-year lows this week on fears that growing difficulties in China and other ‘emerging markets’ will prolong the global recession. From being a possible ray of hope, China’s faltering economy is becoming another source of despair for the global capitalists.”All the above factors mean the current industrial downturn can be far more serious than China’s leaders and most commentators publicly recognise. The Beijing regime continues to reassure the public how ‘basically strong’ the economy is. But in part these statements are tailored to avoid further frightening capitalist ‘investors’ (speculators) – who are more inclined towards panic from the global meltdown than they are to be calmed by recent market-supporting measures from the Chinese regime and central bank."

 Warning from China’s premier

“We must be aware that this year would be the worst in recent times for our economic development,” Chinese Premier Wen Jiabao warned in the Communist Party magazine Qiushi on November 1.

“It is very difficult to maintain high growth and a low inflation rate in the long run. These unfavourable factors have already affected our country, and will continue to. There are also many pronounced problems in domestic economic activity,” he wrote.

As Minqi Li explained in an article in the April 2008 Monthly Review, China’s economic growth in the late 1990s and 2000s depended heavily on it being a net exporter. The US alone accounts for 20 per cent of China’s total export market, so a US recession alone would have a major impact. In 2007, Europe replaced the US as China’s largest export market but Europe too has gone into recession.

China’s rapid economic growth also relied on Chinese capitalists (state and private) and foreign capitalists operating in China exploiting labour at a rate of about “one-twentieth of that in the US, one-sixteenth that of South Korea, one-quarter of that in Eastern Europe and one-half of that in Mexico or Brazil”.

While, a large, productive, and cheap labour force allows Chinese capitalists and foreign capitalists in China to profit from intense and massive exploitation, this places a brake on domestic demand making up for collapsing Western export markets.