© Chriss Street, re-published
with permission from copyright holder
The populist movement sweeping
the world is a direct threat to China as globalization’s biggest winner. A
rebellious tone has swept the world with the Arab Spring, Socialist victories
in France and Greece, Argentina nationalizing oil assets, Indonesia imposing a
50% tax on mineral exports and the Occupy movement here in the U.S. All these
events demonstrate rejection of globalization’s faith in supra-state institutions
such as the European Union, the World Trade Organization, International
Monetary Fund and the G8. This upheaval represents a new rise of nationalism
and an enormous rejection of China as the world’s biggest exporter.
Early last week, China Daily reported
the nation’s foreign-exchange reserves had actually dropped from February to
March by $4.69 billion, “dragged down by short-term capital outflows.”
The Chinese authorities publicly announced that the banking reserve ratio would
be lowered to allow banks to expand lending by $63 billion. But the influential
Stratfor Global Intelligence blog reported China’s four largest state-owned
banks slashed lending by 99% in the first two weeks of May as bank deposits
fell 16% in April and continued to fall in May. This may explain why Chinese
buyers have been defaulting and deferring coal and iron ore deliveries.
Under the international rules
of globalization, Chinese state-owned-enterprises (SOEs) are required to honor
their purchase commitments, especially as prices fall. But back in August of
2009, China's State-owned Assets Supervision and Administration Commission
(SASAC) told the six foreign banks that provide over-the-counter commodity
hedging services that SOEs reserved the right to unilaterally default on
contracts. An SASAC official was quoted “as saying that almost every SOE
involved in foreign exchange or trade had some exposure to derivatives such as
crude oil, non-ferrous metals, agricultural commodities, iron ore and coal,
although only 31 SOEs were licensed to do so.” According to one European
coal trader, after Chinese traders defaulted on at least six thermal coal
cargoes they were being re-offered at a discount. He added: “That doesn't even
take into account the losses on freight rates. So rather than being bankrupted
by these deals, they would rather dishonor the contract to survive.”
The IMF in 2000 identified four
basic aspects of globalization; trade and transactions, private capital and
investment movements, migration and dissemination of knowledge and technology.
China’s communist leadership positioned the nation to win in this new era by
welcoming unlimited amounts of foreign direct investments, but closing its
capital account to prevent Chinese citizens from investing overseas.
Consequently, two thirds of Chinese wealth ended up as deposits in state-owned
banks at low interest rates. Chinese banks leveraged these deposits by a factor
of 45 times to funding the growth state-owned-enterprises, regardless of
profitability.
China’s
industrial capacity has far outstripped China’s ability to consume the goods
those plants produce, in order to maximize employment of impoverished Chinese
peasants. When the Great Recession began in 2007, the Chinese were already
spending an exorbitant 42% of GDP on capital investments. Instead of trying to
rebalance the economy by encouraging domestic consumption, banks threw good
money after bad to push the investment rate to 48% of GDP in 2010. Commodity
prices vaulted as the rapid growth of manufacturing capacity made China the
world’s biggest consumer of iron ore, coal and other base metals.
The huge monetary stimulus led
to an over-heating of the economy, because productive investment opportunities
were already non-existent. “Free money” fueled wide-spread inflation and
powered a speculative real estate bubble. Chinese wages rose so dramatically
that labor costs are now cheaper in Vietnam, Bangladesh and even Mexico
consequently; Chinese exports are under heavy price pressure. Now with faltering
global demand, financially overextended Chinese businesses are only surviving
because bank loans have been refinanced and rolled-over.
The economic theory behind
globalization argues that China should go through an extended period of
austerity and let business bankruptcies create higher unemployment to drive
down wage costs and allow Chinese companies to be more price-competitive. But
according to Stratfor, “The Chinese government has made limiting
unemployment a fundamental policy objective. Unemployment will lead to social
instability and the Chinese Communist Party understands its consequences better
than anyone. Unemployment was one of the engines that fueled their rise to
power.”
The populist rebellion is a
rejection of China’s globalization strategy which only benefits China.
Beijing’s massive stimulus program over the last three years has only
exacerbated the trade imbalance between China and the rest of the world. The
imminent break-up of the European Union and the fading support for the World
Trade Organization means nation-states will increasingly be retaliating against
Chinese imports by building trade barriers. As exports shrink and unemployment
rises, China’s stability will shatter.
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