Behaviour in China appears, at first sight, to be bizarre, but a closer look shows it to be fully consistent with the past, and in its own perverse way, entirely rational.
China was one of the first countries to develop a COVID19 vaccine. Its command economy was well placed to produce it on the mass scale required to roll it out fully to its population, and, indeed, not only has it done so, but it has shipped vaccines to other parts of the world. As an authoritarian state, it more than most, has been in a position to insist that all of its population, and certainly those of its population in the at risk categories, be fully vaccinated. Indeed, the figures suggest that its population has been protected against the virus, with the number of deaths and serious illness long ago dropping to near zero, and even the number of infections falling to low levels. So, why is China continuing to lock down its major cities such as Shanghai, and now potentially Beijing, insisting on a new round of widespread testing, as part of a zero-Covid strategy? Given its dire effects on its economy, it seems inexplicable. Its not.
In fact, the explanation resides specifically in the fact that the zero-COVID strategy places restrictions on Chinese economic growth. Such restriction is required by the Chinese authorities, for the same reason that restricting economic growth, in other developed economies, has been necessary since 2010, leading them to implement measures of fiscal austerity and so on. It is all about asset prices, and preventing the bursting of asset price bubbles. China is the home of many of these bubbles, and the epitome of them is the huge Evergrande bubble.
Evergrande, the world's largest real estate company, has debts of around $300 billion. Of course, its not the only company, or country, with massive debts. With central banks undertaking QE, printing money tokens used to buy up government and sovereign debt, countries were able to issue debt, rather than raising taxes, or growing their economies to produce higher revenues, and companies could do the same, using bond issues also to buy back shares, thereby inflating share prices, and so the paper wealth of share holders. All fine, and the fuel for financial bubbles until such time as reality imposes itself, as it did in 2008, and when the normal mechanisms of the real economy cause interest rates to rise, as the demand for money-capital rises faster than the supply of money-capital, at which point, asset prices start to fall, and as speculators see guaranteed annual capital gains turn into capital losses, they head for the doors, which then causes bond prices to crash, and yields on those bonds to rise sharply, which, in turn means that the debt servicing costs of governments, in particular, soar.
I say, governments in particular, because it is governments that have to cover their debt servicing costs either by further borrowing – to cover the interest, and to redeem the bonds on maturity – or by raising taxes. Companies that have issued bonds to buy back shares, do not need to issue additional bonds. The bonds they've issued usually have a fixed coupon, meaning their debt servicing cost does not rise. They can cover the interest charge out of future profits, and if required go back to issuing shares to finance debt.
As I've described before, companies that see their business growing rapidly, which is the conditions that lead to the demand for money-capital rising faster than its supply, can cover the interest payments, which remain at absolutely low levels by historical standards, easily, out of their rising profits. However, companies like Evergrande that makes its profits precisely out of rapidly rising asset prices, in its case specifically real estate prices, are in a completely different situation. In fact, its a similar situation that such companies and financial institutions found themselves in, in 2008, when a real estate bubble burst, as the first ripple in the bursting of asset price bubbles across the global economy.
Companies like Evergrande are able to borrow to finance their operations on the basis of the size of their balance sheet, and the size of that balance sheet is determined by the paper valuation of the assets of the company. That was the case with banks and other financial institutions in 2008, be it Northern Rock in Britain, or Bear Stearns and Lehman Brothers in the US, or later, the many EU based banks that went down the tubes, in 2010, during the Eurozone debt crisis. When those asset valuations are decimated, as also happened in Japan in 1990, when property and other asset prices fell by as much as 90%, the creditors of these companies, stop lending and begin to call in their debts, leading to a credit crunch, and sharply rising short term interest rates. Borrowers default, and that starts off a second round effect of all those that have speculated on the risk of default also being drawn into the maelstrom, as happened with the so called monoline insurers, and sellers of Credit Default Swaps, in 2008.
The crisis facing Evergrande already saw it suffer a liquidity crisis in 2021, which, in turn, led to falls in stock markets. But, of course, China being China, the state can always come in behind any such large company to prevent default, in the same way that US, UK, and EU states came in to nationalise banks in 2008, when they were about to collapse. But, as 2008, and then 2010, showed, if the debts are big enough, all this does is to transfer the debt crisis from being one facing individual large companies, to one that becomes a sovereign debt crisis, facing the state itself. And, Evergrande is not the only large company in China facing such problems of huge debt. Its perhaps just the best known, currently. As interest rates rise, asset prices, be they those in the US, Britain, Europe, or China, will collapse, and that means a huge fall in the paper wealth of the global ruling class, the top 0.01% that owns its wealth more or less exclusively in the form of this fictitious capital.
And, herein lies the explanation for the imposition of the zero-COVID policy, of the imposition of lockdowns, testing and so on. The Chinese rulers, like the ruling class everywhere, owns its wealth in the form of fictitious capital, be it shares, bonds, or property portfolios. Historically, the ruling class owns its wealth in this form, because the assets are revenue producing, i.e. they provide an annual income in the form of interest/dividends, and rent. However, over the last 30 years, although these revenues have generally continued to rise in absolute terms, as a proportion of the price of the assets themselves, i.e. the yield on the assets, they have continually fallen. The reason for that is that, first the secular fall in interest rates that began in the 1980's, caused asset prices to rise at a faster pace, due to the process of capitalisation, and as available money-capital was recirculated back into the purchase of these assets, in search of what appeared guaranteed capital gains, rather than into the accumulation of industrial capital, so the mass of profits grew at a slower pace, even though the rate of profit remained at a high level, as a result of the sharp rise in productivity that new inventions brought in the 1980's, and into the 90's.
The global financial crisis of 2008 occurred, because, when, after 1999, a new long wave uptrend began, the processes of the previous 25 years, began to reverse. Gross output began to rise at a faster pace than net output. That meant that the demand for money-capital to finance capital accumulation grew at a faster pace than the supply of money-capital (which comes primarily from realised profits, plus any potential to mobilise unused savings), which causes interest rates to rise. Employment grew faster, with the global working class growing by 30%, in the first decade of the new century, and even without that resulting in higher wages per worker, it means a much larger quantity of wages demanding wage goods, which causes firms to need to accumulate capital to meet that demand, or else risk losing market share to their competitors, which drives even faster economic growth, accelerating the process described. Interest rates rise, asset prices fall, guaranteed large capital gains are no longer assured, and speculators rush for the exits, hence the crash.
After the global system had been stabilised, in 2009, states began to take measures to try to prevent those conditions recurring. Capitalist states, as social-democratic states, based upon large scale socialised capital, are in a highly contradictory and conflicted position, and the Chinese state is a social-democratic state. In fact, it is such par excellence, based most clearly on such large-scale socialised capital. Ultimately, the future of the state itself depends upon the growth of this large-scale socialised capital. It requires, long-term planning and regulation of the economy, to create the conditions in which the astronomical amounts of fixed capital investment can be able to produce profits over the long horizon in which it operates.
If it operated rationally, on that basis, it would seek to ensure that everything that drained surplus value, such as the payment of interest and rents, were minimised, so that profits were devoted to this accumulation of capital, including the necessary investment in national infrastructure, where required, to ensure that capital throughout the state could operate efficiently and productively. However, although this large-scale socialised capital, is the property form that determines the state's long-term future and interests, and is, objectively, the collective property of the associated producers, i.e. the workers and managers within these companies, those associated producers do not act as the owners of that capital. They do not recognise that actual position in society, as the nascent ruling class, and are prevented from doing so, by the ruling class, and its ideology, exercised via the state.
The ruling class remains the capitalist class, which has morphed from being the private monopoly owners of that industrial capital, into being merely the owners of fictitious-capital. They have become simply money-lenders, coupon clippers, who lend money to companies, and the state, in return for interest/dividends paid on shares and bonds, or else they are property owners, obtaining rents on the property. As Marx describes in Capital III, the interests of this form of capital is wholly contradictory to the interests of industrial capital. Yet, it is this parasitic excrescence that forms the ruling class, in China, as elsewhere, and which controls not only the operation of the real industrial capital, but also the state. Instead of the state operating in the interests of industrial capital, upon which its own long-term future depends, it acts in the interests of the ruling class, whose short-term interests fundamentally contradict the interests of industrial capital, and the state!
For a time, it worked. By 2014, stock markets had risen to levels above the bubble levels of 2007/8, before the crash. Bond prices had been pushed up to levels above 2008, meaning that yields fell to near zero, and, as central banks came in with even more QE, in the following years, whenever it looked like asset prices were about to fall, those yields were even sent below zero. At its height the total amount of bonds across the globe with negative yields rose to around $18 trillion. But, an indication of what is really going on in China, is shown by the fact that that number is now close to zero, as global bond prices have fallen at the fastest pace on record, with a corresponding rapid increase in yields. In particular, yields on shorter dated bonds have risen most leading to a flattening of the yield curve, and even in parts of the yield curve a yield inversion, with yields on shorter dated bonds exceeding those on longer dated bonds. Two year bonds in Germany, that were negative for years have turned decisively positive, and even the Japanese 2 year bond yield, negative for even longer, and with massive Bank of Japan QE, turned positive for a while.
The cause is again quite easy to discern. In 2018, global economic growth was again on the rise. Governments, across the globe, could no longer justify continued high levels of fiscal austerity, as budget deficits had fallen. Higher economic growth, and a resumption in the growth of total wages, meant firms again needed to accumulate capital to meet rising demand, or lose market share to competitors. Interest rates rose, asset prices fell. Stock markets fell by 20%. Then Trump spiked global growth by embarking on his global trade wars against China and the EU.
The resulting slower growth, gave justification for the Federal Reserve to again jump in with more QE, and to reduce its policy rates. Asset prices rose again, but by 2020, this effect was also wearing off. Higher growth again began to push through, and in response to Trump's trade wars, and Brexit, trade began to simply flow through different channels. Then, economies across the globe were closed down under cover of the pandemic. Economic growth was thrown into reverse, central banks, again, were able to step in to print money tokens on an epic scale, to buy up worthless paper assets, whose prices now soared to even higher levels than before, even as the economies, and profits upon which those prices are ultimately based, was being put into the deep freeze. That is totemic of the deep contradiction upon which the capitalist state is now based.
Across the globe, states have continued to try to impose restrictions on economic growth by the imposition of ludicrous lockdowns, which never could have been a rational response to a virus that is highly specific in its victims, being only that 20% of the population over 60 (and even more specifically over 70) or with other underlying medical conditions. But, with widespread vaccination now in place, providing immunity for around 95% of populations, old and young alike, the risk of death from COVID dropped to near zero, for the vaccinated, and for the unvaccinated, it remains only those in the 20% that are at risk. Governments continued to try to restrain economies by keeping them locked down, even with the risk abolished as a result of such immunity, and even, now, in Britain and elsewhere, long after all such risk has been removed, restrictions of all sorts remain in place that act to reduce economic activity.
But, increasingly, those restrictions could not restrain the natural tendency for economic growth to resume, and all the more so, given that the two year period of lockdown, in conditions where governments now printed money tokens to hand to individuals and businesses as income replacement, enabled them to engage in a splurge of spending once restrictions were lifted. Having seen that demand surge into economies, states have repeatedly tried to hold it back again, by reintroducing restrictions, during 2021, in particular, until the justification for doing so has become impossible. In place of it, has come war fever in relation to Ukraine, and when that failed to stop consumer spending, and firms investing, again more direct means of slowing economies was introduced in the form of widespread restrictions on trade with Russia, in particular the import of gas, oil, grain and other such primary products, which has also acted to massively increase the global prices of them, itself acting as a drain on spending.
Last year, China grew at 18%. So, given what has been said above, its clear why Chinese authorities would want to restrict that growth. China is the workshop of the world, although like other developed economies, a large part of its economy is now service industry, which is labour-intensive. High rates of growth, with high rates of employment growth, translate into rapidly rising interest rates, and consequent falls in asset prices. Hence the imposition of a nonsensical zero-Covid strategy aimed at eradicating even infections, in conditions where near universal immunity means any infection is unlikely to result in serious illness let alone death. The effect of the zero-Covid strategy has been to reduce Chinese growth this year to an expected level of 5%.
And, so, today, we now, again, see the Chinese central bank, proposing to respond to weakness in the Chinese economy – a weakness that is almost entirely due to its own policies of imposing severe lockdowns in Shanghai and other major cities – by, again, engaging in its own policies of QE and monetary stimulus, along with other state policies to shore up real estate prices and so on. In other words, as has happened in capitalist economies across the globe, since 2010, the capitalist state is deliberately undermining and weakening the real economy, and real capital, simply in order to prevent economic growth causing interest rates from rising from what are, ludicrously low and unsustainable levels, so as to keep asset prices, and so the paper wealth of the ruling class inflated.
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