Prediction 3 – China Opens, Booms and Busts
For the last year, I have been saying that, eventually, the Chinese Stalinists would be forced to drop their ridiculous zero-Covid façade, and end the lockdowns. There was no scientific, epidemiological basis for lockdowns, from the start, other than to specifically isolate and protect the elderly 20% of the population who were the only ones at serious risk, a task which the Stalinists, in China, as much as the bureaucrats in the West, failed to do, resulting in millions of elderly people dying unnecessarily, at the same time as destroying economic activity and wealth, destroying the livelihoods of million of workers, and denying millions of young workers of their liberty and education.
When vaccines were produced at the end of 2020, the justification for lockdowns was even more demolished, because it was now possible to focus their roll-out on the elderly, removing the need even for them to be isolated from general society. Western societies did roll-out the vaccines to the elderly, but seeing the surge in economic activity, demand for labour, rising wages and interest rates that followed, which caused asset prices to start falling sharply, they soon returned to the scare stories about new variants of COVID, and rising infections, even though the number of infections was a meaningless metric, and the new variants were all even less virulent than the initial strains. Eventually, however, western societies could no longer keep up the pretence that COVID represented any kind of serious threat to the vast majority of society, as the data continued to show increasingly minimal number of hospitalisations let alone deaths, the majority of which had always, in any case, been of people with COVID, rather than of deaths from COVID.
Western societies opened and boomed, labour shortages intensified, wages surged, as firms could not find workers, interest rates rose, and first bonds then shares dropped sharply. Only continued restrictions on activity and movement, alongside sharp rises in energy and food prices, resulting from NATO's sanctions against Russian oil, gas and food exports, restricted a more rapid rise in consumption, as workers' had to spend more of their budget on these basic items, before they had chance to negotiate wage rises to match them, a process still underway, as hundreds of millions, across the globe, take industrial action to that end.
China, though, had a particular set of problems. As an authoritarian state, its methods of social control are always far less subtle, heavy handed, and bureaucratic than those in bourgeois-democracies, and as a result more brittle. Bonapartism in bourgeois-democracies grew hugely during lockdowns too, in order to justify a clearly irrational and illiberal set of measures, and to suppress any criticism or protest against them. That most of the so called Left, rather than standing against that creeping Bonapartism, actually goaded it on, helped the state, in that endeavour, hugely, especially as the actual opposition to it came from a collection of cranks, right-wing populists and fascists, which enabled any critics to be associated with them, via the old Stalinist tactic of the amalgam. Even so, the irrationality of lockdowns became such that, within bourgeois-democracies, they could no longer be sustained.
That was not a consideration in the totalitarian regime of China. Justifying actions by an appeal to reason is never one the Chinese Stalinists have to contend with, until such time as the irrationality becomes so palpable that the mass of society cannot avoid seeing it, and so responds convulsively to it, and to those seeking to impose it upon them. That was always the way that one Chinese Dynasty was replaced by another, and much the same applies with the Stalinist Dynasties today. The Stalinists had vaccines at the same time they were developed in the West, and they could have simply bought western vaccines to supplement their own, using some of the vast amounts of foreign currency reserves they possess, let alone their huge trade surpluses. They chose, however, not to roll out vaccines to the elderly 20% or so of their population, actually at serious risk. Its reported that China has only vaccinated around 40% of its elderly population, as against more than 90% in most western countries. It has suffered around 1.7 million deaths of the elderly, though its official data does not admit it.
As an authoritarian state, clearly it could have done so by decree, and by mobilising its vast resources to roll-out mass vaccination. There was clearly a purpose in not doing so, and it fitted in with the continuation of lockdowns that the Chinese state could impose at will, en masse, or alternatively selectively, in one area of the country or another. If a part of the economy was overheating, or if a part of the country was seeing protests for one reason or another, the state was able to simply close it down, issuing instructions by text message to citizens to stay indoors. It was an even larger scale, and more authoritarian version of the period during which the British state locked down millions by NHS app, on the spurious basis that they may or may not have been in contact with someone with the virus. Reports showed that, in China, the state used this method to send out messages to protesters, demanding they remained confined, and so leaving them open to arrest if they disobeyed.
China is not only the workshop of the world, and so sees its economy grow whenever the global economy, and, particularly, developed economies grow, but it is also the world's largest market for vast numbers of commodities, such as cars, phones, computers and other electronic equipment. Its vast population, once unleashed, has vast capacity for consumption, much of which is satisfied from its own domestic production, meaning that when consumption rises, Chinese production rises along with it, and so Chinese employment rises, causing wages to rise, especially as China, too, now faces labour shortages. That is particularly true with service industry, which, now, occupies the majority of the economy, in China, as it does in western economies. The last time China opened up, it saw GDP surge by 18%.
China needed to restrain the rapid expansion of its economy, for the same reason that western economies did, which is that the conditions had been created by lockdowns in which a surge of liquidity hit the market causing demand to spike, leading firms to scramble for workers and inputs to meet demand, and not lose market share, which led to them being prepared to pay much higher prices for those inputs, confident that the level of monetary demand, fuelled by huge amounts of liquidity provided by central banks, enabled them to raise prices to cover those costs. That rapid expansion caused the demand for capital to rise relative its supply, leading to rising interest rates, which, in turn, leads to asset prices crashing.
In fact, the lockdowns exacerbated that condition, because, to limit opposition to the lockdowns, states were led to have to replace the incomes of households, and did so by printing yet more money tokens, and spreading them like confetti amongst the population, whilst pretending they represented money. For the duration of lockdowns, that caused asset prices to spike further, but, as soon as lockdowns were lifted it simply acted as though a dam had been breached, multiplying the force of the torrent. In western economies the process is proceeding, as it always does, in a series of waves and surges.
The first led to a surge in employment and inflation, rises in interest rates, and the biggest ever fall in bond prices, which carried into stock market falls of 20-40%. Wages for workers in specific sectors, where there are chronic shortages of labour, spiked, and workers found they could change jobs and obtain an average 15% rise in pay. Despite the Tory propaganda, private sector workers have been able to obtain significant pay rises, often without industrial action, or with just a couple of days action, as with the 17.6% pay rise won by Rolls Royce workers. It is in the state sector, and those closely tied to it, as with the railways, where the government has used its power to try to hold back wages, that workers have been forced to have to engage in larger scale strike action.
Consequently, although the total amount going to wages has been rising significantly, due to increased employment and so on, hourly wages continue to lag behind the headline rates of inflation. To compensate, households use some of their accumulated savings from the period of lockdowns. Demand continues to rise, frustrating the orthodox pundits seeking a recession, but has started to rise at a slower pace. Once the current strikes and other factors pushing wages higher flow through, however, there will be another wave of liquidity and demand spurring economies forward, which is why there will be no global recession, and that wave will also push interest rates higher, causing a further, and more significant crash in asset prices, with liquidity then also flowing from assets into the real economy..
China has the same asset price bubbles that the West has, and for the same reasons. Its ruling class owns its wealth in the form of fictitious capital, and has sought to protect that paper wealth by the same means of printing money tokens to buy up and inflate the prices of assets, and by holding back the development of the real economy, capital and wealth, so as to hold down interest rates and prevent asset prices crashing. Indeed, the Chinese ruling class is part of the global ruling class that owns its wealth and derives its power from this ownership of fictitious capital. The fact that the interests of real Chinese capital, come into conflict with the interests of real US capital, as with the interests of real European capital, is simply an indication of the contradictions existing between these different forms of capitalist property themselves, and their reflection in the world of ideas and politics.
Indeed, given the rigidities of Chinese society, these contradictions are heightened. A large part of the asset price bubble in China can be seen in its huge property bubble, and the state has repeatedly had to pump additional liquidity into it to prevent it busting. Even so the huge Evergrande property empire has collapsed, surviving on state life support, and threatens to be a Chinese Lehman's. The increase in global interest rates, crash in bond prices, and surge in bond yields, brings this to a head. After 20 years of surrealism, even Japan's central bank has now had to rejoin the real world, as Japanese inflation rises, and the Yen was cratering, and to begin the process of ending its policy of yield curve control, which saw the yield on its 10 Year JGB more than double in a single day. No one in financial markets believes the BOJ's Governor's claim that this is not the start of some continued shift, and markets are already preparing to test him on it. It puts even greater pressure on Chinese financial markets.
The Chinese authorities may have to accept reality too, whilst gearing their response to it accordingly. They have been forced to drop the lockdowns as a consequence of popular uprisings. Propaganda is coming out about large numbers of infections, but infections are meaningless, especially in relation to the later strains of COVID. Further propaganda is coming out in relation to deaths, some of it western propaganda trying to justify their own irrational behaviour during lockdowns. But, its unlikely that, now, lockdowns are returning. For one thing, the opening up and large numbers of infections will quickly create herd immunity. It also creates an incentive for the elderly to get vaccinated quickly.
So, a rapid opening is again likely to bring a surge in economic activity. As a result of China's lockdowns in the last year, a lot of primary product prices fell, as its the biggest consumer of them, and global surpluses were formed. That is now likely to reverse, but, with NATO sanctions on Russian oil and gas, and food exports, China will be able to take advantage of that to suck in imports from Russia, also further intensifying the growing symbiotic relation between Russia and China and formation of a Eurasian economic bloc. It will also make meaningless the attempts of NATO to impose a price cap on Russian oil and gas sales. China has an incentive in seeing those sanctions fail, because they are part of a wider economic war being waged by NATO against not only Russia, but also against China, as with the restrictions on sales of technology and so on. That is part of a growing inter-imperialist rivalry that is heading inexorably towards WWIII, unless the international working-class prevents it.
As part of that, China needing to finance its expansion, and seeing asset prices crashing, and yields rising, will look at what may be happening in Japan. As it ends its policy of yield curve control, lots of Japanese savers and speculators, who had been facing negative yields on their bonds, and who had, therefore, bought US Treasuries, will now start to repatriate that liquidity, which will feed into the Japanese economy. China has vast amounts of money tied up in US Treasury Bonds. As it seeks to finance capital accumulation at home, it will also have an incentive to repatriate some of those funds from the US, especially as it looks at the way Russian assets were simply seized by western governments. That liquidity flooding back into China will cushion the crash of its asset prices, shifting that burden on to its increasingly obvious imperialist rivals in the West, and the US, in particular.
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