"The banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. They frankly own the place."
-- U.S. Senator Dick Durbin, Democratic Party Whip, April 30, 2009
While the U.S. spends trillions of dollars to bail out its banking system, leaving its economy to languish, China is being called a "miracle economy" that has decoupled from the rest of the world. As the rest of the world sinks into the worst recession since the 1930s, China has maintained a phenomenal 8% annual growth rate. Those are the reports, but commentators are dubious. They ask how that growth is possible, when other countries relying heavily on exports have suffered major downturns and remain in the doldrums. Economist Richard Wolff skeptically observes:
"We now have a situation in the world where we have a global capitalist crisis. Everywhere, consumption is down. Everywhere, people are buying fewer goods, including goods from China. How is it possible that in that society, so dependent on the world economy, they could now have an explosive growth? Their stock market is now 100 percent higher than at its low -- nothing remotely like that hardly anywhere in the world, certainly not in the United States or Europe. How is that possible? In order to believe what the Chinese are saying, you would have to agree that in a matter of months, at most a year, no more, they have been able to transform their economy from an export-based powerhouse to a domestically focused industrial engine. Nowhere in the world has that ever taken less than decades."
How can China's stimulus plan be working so well, when ours is barely working at all? The answer may be simple: China has not let its banking system run roughshod over its productive economy. Chinese banks work for the people rather than the reverse. So says Samah El-Shahat, a presenter for Al Jazeera English who has a doctorate in economics from the University of London. In an August 10 article titled "China Puts People Before Banks," she writes:
"China is the one leading economy where the divide "" the disconnect between its financial sector and the world normal Chinese people and their businesses inhabit "" doesn't exist. Both worlds are booming again and this is due to the way the government handled its banks. China hasn't allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers."
What Wolff calls a "global capitalist crisis" is actually a credit crisis; and in China, unlike in the U.S., credit has been flowing freely, not just to the financial sector but to industry and local government. State-owned banks have massively increased lending, with local governments and state enterprises borrowing on a huge scale. The People's Bank of China estimates that total loans for the first half of 2009 were $1.08 trillion, 50% more than the amount of loans Chinese banks issued in all of 2008. The U.S. Federal Reserve has also engaged in record levels of lending, but its loans have gone chiefly to bail out the financial sector itself, leaving Main Street high and dry. Writes El-Shahat:
"In the UK and US, the financial sector is booming, while the world of normal people seems to be going from bad to worse, unemployment is high, businesses are folding and house foreclosures are still taking place. Wall Street and Main Street might as well be existing on different planets. And this is in large part because banks are still not lending money to the people. In the UK and US, banks have captured all the money from the taxpayers and the cheap money from quantitative easing from central banks. They are using it to shore up, and clean up their balance sheets rather than lend it to the people. The money has been hijacked by the banks, and our governments are doing absolutely nothing about that. In fact, they have been complicit in allowing this to happen."
Cracks in the Chinese Wall?
The Chinese economy is not perfect. The push to make profits, particularly from foreign investment capital, has encouraged speculative ventures, with a great deal of money going into high-rise apartments and other real estate developments that most people cannot afford. Chinese workers are now complaining of too much capitalism, since they are having to pay for housing, health care and higher education formerly picked up by the State. And while efforts are being made to make more loans available to medium-sized and small businesses, state-owned businesses and large corporations are still getting most of the loans. This is because the banks have been told to tighten their lending standards, and these larger entities are safer credit risks.
Wolff thinks China's "miracle" is a bubble that is about to burst, with catastrophic consequences. Historically, however, when bubbles have collapsed suddenly it has been because they were punctured by speculators. When the Japanese stock market bubble burst in 1990, and when other Asian countries followed in 1998, it was because foreign speculators were able to attack their currencies with exotic derivatives. The victims tried to defend by buying up their own national currencies with their foreign currency reserves, but the reserves were soon exhausted. Today, China has accumulated so much in the way of dollar reserves that it would be very difficult for speculators to do the same thing to the Chinese stock market. A gradual stock market decline due to natural market forces is something an economy can take in stride.
Economic Role Reversal?
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