Global economy can forget China 'rescue'

Once hailed as the country that would ride to the rescue of global capitalism, China is now gripped by political turmoil and, increasingly, serious economic difficulties that are already impacting on the rest of the world.

The renewed disorder on world markets is not only related to the likelihood that Spain and perhaps Italy will soon need bailing out because they are unable to finance their debt burden. Falling share markets are also a reaction to the news from China, where the world’s third largest economy has stalled amidst an unsavoury power struggle at the top of the ruling Communist Party.

In a spectacular fall from grace, Bo Xilai, son of a revolutionary hero, was yesterday suspended from the 25-member politburo and the larger central committee while his wife, Gu Kailai, was arrested on suspicion of murdering British businessman Neil Heywood. Bo had already been dismissed as party chief in Chongqing.

Heywood was found dead in a hotel room in Chongqing on November 15. A mercurial and murky figure, Heywood was a close associate of Bo’s and is also thought to have worked for British intelligence in China. At the time of Heywood’s death, police in Chongqing informed British consular officials that he had died from “excessive alcohol consumption”. His body was quickly cremated.

From his power base in Chongqing, Bo earned a reputation for ruthlessly smashing organised crime, increasing foreign investment and running Maoist-style campaigns involving singing contests and sending people out to work in the countryside. He was seen as an opponent of and a threat to the pro-free market leadership in Beijing.

Bo upset the local business elites and outgoing Chinese premier Wen Jiabao targeted him personally in his farewell briefing at the National People’s Congress, warning that the country could not tolerate another upheaval like the Cultural Revolution of 1966-76 that Mao set in train.

Behind the power struggle between elite factions/families in the party hierarchy is an economy that is unbalanced and heading towards an almighty crash. A sharp fall in imports indicates that the Chinese economy is not growing fast enough to take the strain of decline in consumer demand in other countries.

Imports in March increased at almost half the pace predicted by analysts, with the rate of growth more than seven times less than in February. The economy probably expanded 8.4% in the first quarter. That would be the slowest pace of growth since 2009. There is no way China is going to rescue world capitalism.

Michael Pettis, a professor at Peking University's Guanghua School of Management, says says the Chinese model is based on repressing consumption in favour of capital expansion. He warns:

As a consequence of this consumption-repressing growth model, Chinese growth is driven largely by the need to keep investment levels extraordinarily high. What’s more, the very high growth rate in investment, combined with significant pricing distortions, especially in the cost of capital, has resulted in massive overinvestment and an unsustainable increase in debt.

Add in concerns over “shadow banking” - underground lending and investing networks estimated to total $1.3 trillion - debt-laden regional authorities and rising inflation, and the political power struggle in China takes on a new significance.

The global crisis is now pretty much uniform in its appearance: political crisis at the top of the state, indebted economies unable to deliver much-vaunted growth to keep recession at bay and a widespread discontent amongst ordinary people. No resolution of multi-sided problems are in sight and a long period of social upheaval, assuming a revolutionary character, is definitely where we heading for.

Paul Feldman
Communications editor