Domestic consumption is not weak on any long term measure. The percentage of CN manufacturing dedicated to exports has declined/stagnated for 10 years.

Not just that but also the share of the state sector is growing China versus the US

As you can see, really, the only way out for China is to build a strong consumer base that is not fueled by debt, but through increase in real wages and net assets (and hopefully, not the housing assets that are bound to crash at some point).

Ok lets be clearer. The Marxist approach is to increase the government control of the economy. For the capitalist side, the only thing that ought to matter is profitability. As long as the state controls key sectors we can also ensure capitalist exploitation doesn’t increase.

China’s success is based on this contradiction. The state must increase control while keeping exploitation in check yet capitalist profitability relies on constantly increasing exploitation? China gets to benefit from becoming the industrial center of the world, capitalist profitability can remain high(though it is dropping in CN now) as long as the government also covers all the social costs and keeps driving investment. More investment more production more consumption. Not the other way.

So far all the data supports this, China grows, state owned ownership grows DESPITE growing debt and growing unproductive sectors. For the economy to keep growing, only investment matters.

This is the central point. And what I said before at the very start, financialisation here got realy nothing to do with who is your favorite Marxist, but rather evil actor theory that NakedCapitalism and other right wing adjacent(and MSM with CN collapse fetish) would love to be true. If you can fix Capitalism you obviously don’t need Communism.

IIPPE 2023 Part Two – China, profitability and financialisation

But Lo points out that industrial sector profitability remains high; it is the profitability of unproductive sectors like real estate and the stock market that has fallen back – and we know that China is facing a real estate crisis. Also, profitability has fallen because of a rising share of wages in value added (unlike in the West) and a rise in the organic composition of capital, following Marxist theory.

For me, Lo’s paper poses the major contradiction in China’s weird, hybrid economy. If the profitability of capital falls, that reduces investment and productivity growth in the capitalist sector. For me, that increases the need for China to expand its state sector to make the economy not so dependent on profitability, particularly in technology, education and housing.

In another session, Grzegorz Kwiatkowski and David Luebeck of the Berlin School of Economics looked at the degree of state control over companies in China. Of the 100 largest Chinese enterprises, there are 78 state-owned companies. The dominance of state-owned enterprises in the Chinese economy is much greater than in most other countries, reflecting the unique role they play in China’s economic system.

Again, this is something that I have outlined in my own work (see Capitalism in the 21st century p214). Using the IMF data on the size of the public sector for all countries, I found that, in 2017, China had a public investment to GDP ratio more than three times any other comparable economy, with the others averaging around 3% of GDP.

However the CPC did allow unproductive sectors aka financialisation, which is why there is only one correct way to handle it i.e taking ownership of the debt, erasing it while letting unprofitable/bankrupt business/investors go broke and pay their share. I think almost everyone agrees with this approach includinb both MR and Hudson.

For the Marxist perspective the solution is continue on the path of increasing government control, for the housing specificaly see below.

China and the ‘experts’

Surprise! The ‘over-invested’, ‘wildly unbalanced’ Chinese economy has delivered by far the faster consumption growth for its people – nearly four times faster than the consumer-led US, nine times faster than Japanification and even 50% faster than India. What this suggests that if China were to ‘rebalance’ its economy towards the consumer and reduce investment; and also reduce the public sector and ‘free up’ the private sector (the sector that provides most consumer goods in China), China’s growth rate would fall even more than it has done in recent years!

As it is, the consumption to GDP share graph is misleading. First, this measure of consumption excludes the social wage, particularly health and education, social care and public services. In countries like the US, much of this social consumption has to be paid for and so appears in the consumption share. That is not the case for much of social consumption in China. China has a long way to go in social consumption, but it is way ahead of its emerging market peers in many areas and not so far behind leading G7 economies, who started more than 100 years before.

Second, the graph shows consumption as a share of value-added (GDP) ie to the ‘final consumer’. In the US, consumption would seem to constitute 70% of GDP. However, if you look at ‘gross product’ which includes all the intermediate value-added products not counted in GDP, then consumption is only 36% of the total product; the rest constitutes demand from capital for parts, materials, intermediate goods and services. It is investment that is the swing factor and driver of demand, not consumption by workers.

What is true is that ‘productive’ investment growth has fallen back in China. Investment in new technology, manufacturing etc has given way to investment in unproductive assets, particularly real estate. In my view, successive Chinese governments made a big mistake in trying to meet the housing needs of its burgeoning urban population by creating a housing for sale market, with mortgages and private developers being left to deliver. Instead of local governments launching housing projects themselves to house people for rent, they sold state assets (land) to capitalist developers who proceeded to borrow heavily to build projects. Soon housing was no longer “for living but for speculation” (Xi quote). Private sector debt rocketed – just as in the real estate bubble in the West. It all came to a head in the COVID pandemic as developers and their investors went bust.

The real estate crisis has remained unresolved. It is interesting to see what the Western experts reckon is the solution. This is what Michael Pettis says: “Unfortunately, it will require a revival of speculative buying to prevent further contraction in the property sector and real estate prices, something which would only make things worse in the medium to long term.” (Tweet, 5 March). So the answer to the property crash is more speculation even if it makes things worse in the future!

That’s not my solution. What the Chinese government needs to do is take over these large developers and bring them back into public ownership, complete the projects and switch to building for rent. The government should end debt payments to foreign investors and only meet obligations to small investors; and transfer housing out of the mortgage and private finance system.

The real estate sector has got so large in China as a share of investment and output that it has seriously degraded overall growth. This is where the economy does need rebalancing. Outgoing PM Li said that China needed to “expand market access” for foreign investors, ‘prop up’ consumption and control risk in the real estate sector. Li pledged to help “high-quality, leading real estate enterprises” while continuing to “prevent unregulated expansion”.

Really, can Li square the circle? China’s private sector has mushroomed in the last two decades. It has led to an unhealthy expansion of billionaires and rising inequality of wealth and incomes. And just as in the West, as the profitability of productive capital fell, the capitalist sector switched into unproductive investment areas, like finance and real estate. Debt has rocketed. This has increased the risk of economic crises as in the West.

How do Chinese households borrow to consume if both their savings growth, their income growth and the consumption growth have been comfortably and sustainably larger than HH debt growth. HH debt can also be a bunch of things not related to most aspects of consumption so unless we have some ready to go data we cant know where that debt went and its a huge leap to call China’s consumption growth “debt fueled”. Like HH have to borrow to be able consume but also HH savings are at the same time growing faster and higher than HH debt ? They get in debt to be able to sustain their consumption but also they are able save up more than the debt they get into ? Doesnt pass the smell test.

Also the aggregated debt figure compared nominaly against the GDP may tell us absolutely nothing about how distressed the average household balance sheet is given the income and regional inequalities in China in the last decade and the economic activity of different groups. Its much more likely that upper middle housholds and individuals leveraged too much on the property market and speculation (irregardless of their returns) and on the average household level i would imagine most debt figures have accumulated from the explosion of car purchases and payments that foundementaly add a bunch to HH debt calculation no matter how healthy peoples balance sheet is. So Its less of an issue if HH debt going up mostly as a function of mortgage penetration for higher income earners but not coming at the expense of savings or consumption (but also not financing those things) for the average houshold.