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State Capitalism
"'Have a head for figures.' That is to say, we must attend to the quantitative aspect of a situation or problem and make a basic quantitative analysis. Every quality manifests itself in a certain quantity, and without quantity there can be no quality. To this day many of our comrades still do not understand that they must attend to the quantitative aspect of things - the basic statistics, the main percentages and the quantitative limits that determine the qualities of things. They have no 'figures' in their heads and as a result cannot help making mistakes. -- Mao Tse Tung, Quotations of Chairman Mao
The state and capitalism, few bits of history are as distorted and misunderstood. The simple fact is that the state, as Karl Polanyi chronicled in his essential 1944 book The Great Transformation, was integral to the development of capitalism from the beginning. Yet today in any discussion of political economy, we are meant to think somehow the state's and capital's always close relationship instead of being the rule, is not simply an exception, but some sort of great violation.
If we look at capitalism across its two and half century history, it essentially has three components; modern debt-money/banking, industrial technology, and the corporation. With each of these factors, the state was and is tightly entwined. Looking across this relatively short span of history, it's difficult to discern whether the state or capitalism was the senior partner. Over the last couple decades, the two have morphed together to become almost indiscernible. Nowhere outside the United States is this system, call it “state capitalism,” more apparent than China.
A recent book called Red Capitalism by Carl Walter and Fraser Howie, both have extensive experience in global and Chinese finance, sets out the structure of Chinese state capitalism. The book is an excellent expose on the tremendous change China has undergone over the past quarter-century with industrialization, creating to paraphrase Premier Deng, capitalism with Chinese characteristics. However what's most interesting, as Chinese capitalism has evolved in the past two decades, its main model the United States evolved increasingly to resemble China.
In hoping to understand the present Chinese system, it is important to at least glimpse Chinese history. Chinese civilization is at least four-thousand years old. Comparing it to the West, using the Greco-Roman era as the West's beginning, China is a millenia and half older. It is a great civilization, giving the world many things including, paper making, printing, gunpowder, and the compass. Yet until six hundred years ago, the world was large, and China and the West had limited contact, but with the great European global expansion, the West would enter China. What might be considered one of the weird quirks of history, for a century none other than the Jesuits were the West's main ambassadors.
Relations between Europe and China would remain tentative for the next couple centuries. In the 19th century, the weakening Chinese imperial dynasty would clash with the ever expanding European powers, resulting with the Chinese reluctantly opening small areas of China for Western capital expansion. Finally, the four thousand year dynastic system would collapse at the beginning of the 20th century, and in the second decade, the very Western notion of a republic was declared across the breadth of the great Middle Kingdom. This short republican period in China was racked with war and chaos for almost five decades, ending with the triumph of the communists and the establishment of the People's Republic of China.
It's important to understand the four thousand year dynastic period of China was that of an agrarian society. Government power was tremendously centralized with decrees emanating from the emperor and carried out by an extensive and expansive bureaucracy – a necessary component of all centralized power systems. In the first twenty-five years, the People's Republic was led ostensibly by Chairman Mao, who was first and foremost a revolutionary, having spent over two decades in armed conflict before gaining power. Mao made various attempts, including the Great Leap Forward and the Cultural Revolution, to decentralize traditionally centralized Chinese power. From a geometric power perspective, dynastic China was not much different than other agrarian civilizations, such as the Egyptians, Aztecs, or Spanish. One exception for five hundred years was Republican Rome.
Mao's attempts proved less than successful and by the time of his death, China was once again in turmoil. Deng Xiaoping would take over Chinese leadership and offer a new opening. “Socialism with Chinese characteristics,” Deng stated. But by the time the process really got into gear at the end of the 1980s, the first great socialist experiment the world knew, the Soviet Union, was crashing fast. One model of industrialization and just as importantly, the only remaining global-wide power was the United States.
In turning to the American model, the Chinese turned to the American banks and money system. Interestingly enough at the end of the 80s, as the Chinese turned to the American banking system, the American banks were undergoing the greatest changes they had undergone in a half-century. Unbeknownst to both sides then, 25 years later the two banking systems would have tremendous commonalities, but not in ways any banking expert of the late 80s might have guessed.
It's important to understand the Chinese banking system is only two decades old, and as the authors of Red Capitalism state, “The new China of the 21st century is a creation of the Goldman Sachs and Linklaters & Paines of the world, just as surely as the Cultural Revolution flowed from Chairman Mao's Little Red Book.” And in understanding this, it's also important to understand, the American banking system is only two centuries old, and in relation to Chinese history, that's a very short time.
At the time of Deng's great opening of the Chinese economy there were no banks, except the People's Bank of China(PBOC). Their money system was modeled on the Soviet system, which simply printed money on a as need basis. Similarly, there were no corporations in China, with economic activity decided and instigated by government agencies such as the Ministry of Agriculture or Ministry of Coal, etc. So, in opening their system based on the American financial model, the Chinese created banks.
Unlike in 19th century freewheeling frontier America, where American banking evolved, and despite Mao's best efforts, China was still a tremendously centralized power structure. The imperial dynasties of old were replaced by the Communist party and its bureaucracy. So, the Chinese created large centralized banks. Today, Walter and Howie write, “In China, capital begins and ends with the Big 4 banks and Bank of Communications... In 2010 state-controlled commercial banks held US$15 trillion in financial assets, of which the Big 4 banks alone accounted for almost 60 percent. These four banks controlled 45 percent of China's total financial assets.”
Notice importantly how this is not much different from the United States today, where a half-dozen banks control over 60% of American banking. And to note, the authors add about China, but the same can be said about the US, “Such a concentration of financial assets in the banking system is typical of most low-income economies. What differs in China's case is that the central government has unshakeable control of the sector.” But, that's getting ahead of the story.
When the Chinese banking system was developing in the 1980s, relatively shortly it ran into its first crisis where liabilities soon outpaced assets. The entire system was reformed in 1994, and this is the system largely in place today. However, in the 1994 reform, the bad debt created by this first wave of Chinese banking was not written-off, losses were not taken, they were “worked-out.” It's also important to understand that on several occasions since 1994, such as the Asian financial crisis of 1997 and more recently the global financial panic of 2008, bad debt has not been written off, but worked-out.
The most ingenious and extensive way to work-out bad debt was developed in 1998 and concerned the Guandong International Trust and Investment Corporation(GITIC), responsible for one of China's real estate bubbles. Then Premier Zhu Rongji was outraged to find that GITIC “financial losses were unquantifiable.” When finally brought to account, GITIC's had “assets of $2.6 billion and liabilities of $4.4 billion.” Now that does sound like 19th century American banking and a little too close to 21st century!
Instead of the great brutal busts and then purges of bad debt that characterized American 19th century banking, the Chinese evolved a different process. Starting with GITIC, on several occasions bad debt has been taken-off the books of the banking system and moved into newly created Asset Management Companies(AMCs). These AMC's are then recapitalized by either the Ministry of Finance using government bonds or the People's Bank of China, the central bank of China, by printing more Renminbi. The new companies issue new debt, mostly bought by the banks. Though now off the banks' books, the AMC's remain mostly owned by the banks.
Walter and Howie describe it as a “... perpetual “put” the PBOC has extended to the AMCs. In fact, this “put” extends beyond the AMCs to the entire financial system...With this option available to them, bank management need care little about loan valuations, credit, and risk controls. They can simply outsource lending mistakes to the AMCs, perhaps on a so-called negotiated commercial basis, and the AMCs will be automatically funded by the PBOC.”
Red Capitalism's authors then ask, “Are these asset companies any different from those puffed up special purpose vehicles whose deflation led to the bankruptcy of Enron, not to mention the near collapse of the American financial system in 2008?” To which the short answer is no. According to Walter and Howie the various AMCs all have clauses in their financial statements like this,
“According to a notice issued by the MOF, starting from January 1, 2005, the MOF will provide financial support if Cinda(AMC) is unable to pay the interest in full. The MOF will also provide support for the repayment of bond principal, if necessary.”
This MOF and PBOC “put”, their assurance to pump money to bailout bad debt, is similar to the infamous “Greenspan put,” where Wall Street and American bankers came to understand every time the stock market was headed down, the Federal Reserve would make money easy for the banking system. The Greenspan put evolved again after the Great 2008 Panic into the “Bernanke put,” which also like China, now includes massive amounts of bad debt. Mr. Bernanke's put currently pumps a hundred billion dollars a month into the banking system. We presently see the stock market reach new highs.
In response to the Great 2008 Panic, China dumped trillions more Renminbi into their banking system. Walter and Howie write, “If the Asian Financial Crisis in 1997 caused one set of Chinese leaders to see the need for true transformational reform of the financial system, the global crisis of 2008 has the opposite effect on the current generation of leadership. Their call for massive stimulus package reliant on bank loans may have washed away for good the fruits of the previous 10 years of reform.”
Just as interesting, though not as powerful as the development of Chinese banking, has been the development of China's corporate debt market. We have defined capitalism as a bank money-debt system, technology, and corporations. The Chinese developed their corporate system by “privatizing” their former government ministries and partnering with mostly Western banks and corporations.
What has evolved is a still concentrated system of economic control, that has some privatized elements, but remains mostly state run, and more accurately run by various elements of the Communist party. In fact this limited capital opening resembles the same geographic opening process the Chinese undertook in the 19th century with the West. Walter and Howie write,
“Banks hold over 70 percent of all bonds, including those issued by MOF. Taking this a bit further, in the stock markets as well, the huge deposits placed by institutional investors seeking share allocations in the primary market are also funded by loans from banks.”
And,
“China's debt markets are captive both to a controlled interest rate framework on the one hand, and on the other, to investors that, in the end, are predominantly banks. Banks own 70% of corporate bonds.”
Zhou Xiaochuan of the People's Bank of China stated in 2005, “China's corporate bond market has been developing very slowly and its role in economic growth has been rather limited. Such lack of development has also distorted the financing structure and produced considerable implicit risks, whose consequences may be grave for social and economic development.”
So, China's banks in the words of the Great Helmsman have “no head for figures,” to such an extent it's difficult to say China really has a bank debt-money system. What does it have? Simply, it remains closer to the old Soviet model in which the MOF and PBOC create money on a as need basis to foster economic activity. This is not to say the system doesn't have debt, Walter and Howie write,
“The budgetary dependence on debt can also be seen in the rapidly increasing amount of maturing central- and policy-bank making debt. Over the period from 2003 to 2009, the value of maturing MOF and policy bonds grew at an annual compounded rate of 22.5%. These bonds were all refinanced; that is rolled over into the future.”
Again, if the debt never matures but simply is rolled over, it's difficult to say there's a debt-money system. What it does say is debt-money as some sort of accounting measure is of limited value because of the government's pushing unlimited money through the MOF and PBOC. Returning to Mao's point, with no quantitative limits, there's no ability to measure quality.
The key to the system's viability at this point has been China's development of an industrial infrastructure. In no way is this development unprecedented, in fact China's followed fairly closely the model of Western industrial development across the planet for the past two centuries. What is unprecedented is the scale, and of course when you're a Western banker and can profit from such large numbers, scale is all that matters.
Just as the American debt-money system is based on industrial technology, so is the “as needed” industrial currency of China. However, unlike the US, where the banks developed as a separate power structure controlling the money system, the Chinese banks have basically remained secondary to both the state and party. The real money power lies with MOF, PBOC, and the Chinese corporations.
The Chinese corporations are the real money printers in the Chinese system. They remain wholly or majority owned by the party and state. Very importantly, they also provide vast amounts, over three trillion dollars of foreign reserves, from the export heavy development model – all the better for Western banks to profit. These foreign reserves have till now provided a great wall of protection for the internal Chinese financial system, offering the entire Chinese monetary system together with its manufacturers, a certain global value, outside of what is otherwise a very circular internal value system. In many ways, these corporations are the true money centers. They create dividends, which are then paid to the government, who then give the money back to the banks.
Walter and Howie write of these massive State Owned Enterprises(SOEs),
“Banks still remain subordinate to SOE's, chairman/ceos of these banks carry only a rank of vice-minister. The reason for this exception appears to be straightforward: the Party seems to have wanted to ensure the banks remained subordinate entities, and not just to the State Council, but to the major SOE's as well. Banks were a mechanical financial facilitator in the Soviet system; the main focus of economic effort was on the enterprises. Little has changed.”
“The chairman/CEOs of these companies hold ministerial rank and are appointed directly by the Organization Department. These men rank equally with provincial governors and all ministers on China's State Council, and many are members or alternates of the powerful central Central Committee of the Communist Party of China. What would the Chairman of China's largest bank do if the Chairman of PetroChina asked for a loan? He would say: 'Thank you very much, how much, and how long?'”
These corporations are the great powers in China and in a passage that would be familiar to all Americans, Walter and Howie write, “With access to huge cash flows, broad patronage systems and, in many cases, significant international networks, the senior executives of the National Champions(corporations) can expect to succeed in lobbying the government for beneficial policies or even to set the policy agenda from the start.”
So, we can see the Chinese and American systems, though starting from what were once considered opposite ends of the earth are converging. So much so that Walter and Howie make some unintentionally funny comments about the Chinese system, that could just as well be said about the current American system dominated by a handful of large banks, massive corporations and the Federal Reserve. They write,
“In China, however, the Party has made sure it alone, and not a market driven yield curve provides the definitive measure of the risk free cost of capital.”
“What would a modern economy be if didn't have a government bond yield curve to measure risk?”
“The engine at the heart of the debt markets is the valuation of risk and this is missing because the Party controls the interest rates.”
“Chinese markets are often seen to be uncoupled from the actual economic fundamentals of the country. A rough comparison of simple GDP growth and market performance would certainly show minimal correlation between the two.”
The last most appropriate as the Dow Jones hits record heights. All four points are just as appropriate for an American system, which now like its Chinese counterpart, refuses to acknowledge bad debt and simply keeps pumping more as need money into the system. As Chairman Mao said, “This day many of our comrades still do not understand that they must attend to the quantitative aspect of things.” This goes not just for the comrades in Beijing, Shanghai, and Guangzhou, but those on Wall Street, in Mountain View, and in the halls of the Federal Reserve.
What we see in China and the US is the morphing of an evolving system of state capitalism, first and foremost protecting established interests, whether they're financial, technological, or political. The overall health of the economic system is valued solely on the profits of massive corporations. They are centralized systems and tremendously unaccountable via money, because essentially their money system is incapable of helping provide “the basic statistics, the main percentages, and quantitative limits” of the economy.
If we are to look through capitalism's brief history, and try to cut across its myths and propaganda, and that is a thick undertaking for any system that has its own numerous orders of priesthood, nonetheless when we do that, fundamental to the beliefs of the capitalism is the functioning of some sort of quantitative and qualitative accounting mechanism provided by markets and pricing. Leaving aside the question of what's a market, particularly in a system dominated by a small group of massive corporations, we are still led to believe that a pricing system quantitatively gives us some sort of qualitative analysis. And now the nut, when you have a pricing system where large centralized forces continually intervene in the money system to continue carrying bad debt and continually creating more money to do so, you do not have a very viable pricing system, thus limiting accountability. The money system becomes increasingly incapable “to determine the qualities of things.”
Walter and Howie end stating unlike their American state capitalist counterparts,
“The conclusions about the global financial crisis now being drawn by the Chinese government suggest that opening and reform along the lines of the now apparently discredited international financial model will no longer continue. This is not to say there is another model. . . except for the prolongation of the status quo, and this is the direction to which recent events point.”
And that is the most imperative question for the Chinese, Americans and the rest of the globe, “How long can the status quo be prolonged?”
For just as in America, Europe and Japan, to which it is integrally tied, Chinese industrialization is reaching its limits, the system is becoming stagnant, and it is both from a resource and technological stand point unsustainable. The money system becomes increasingly incapable of providing any beneficial analysis, in fact it evolves further into a protection racket for the status quo. The Chinese, encouraged by American bankers, adopted a system that had already seen its better days and was in need of great reform itself.
So, how long can the status quo continue? The short answer is probably longer than you think. There are three main forces to consider in answering that question:
1)Oil
2)Technology
3)Resource and environmental constraints
All three are interrelated and how you perceive their future development will give you the best estimate to how long the current processes, in China, the US and across the planet can be sustained.
The industrial revolution was a technological revolution powered by fossil fuels. It is this technology that created the modern money system and the modern corporation. We are reaching the end of the era of cheap oil, which has been a fundamental element of the money system for a century and half. We are hurling at tremendous speed into a new era of technology, call it the quantum era, one empirically different than the industrial era, both quantitatively and qualitatively. Finally, humanity for the first time in its existence is coming to understand we live on a small planet of limited resources and our actions in that regard all have consequences.
So we continue, both the US and China, moving head long and full speed in one direction with waves crashing ever more furiously across the bow, along a course in historical terms that is very new. The Great Helmsman looks upon the increasingly frenetic scrambling across the deck, shaking his head laughing and saying, “They have no 'figures' in their heads and as a result cannot help making mistakes.”
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