International Business

Environment

mar (102), Abhinav Jhangra (103), Abhishek Singh Gaur (104), Ajey Singh (10

Contents
Introduction.................................................................................................................. 2
China and Global Capitalism............................................................................................ 3
Economic and Social Contradiction................................................................................... 5
Falling rate of Profit....................................................................................................... 7
Coming Economic Crisis?.............................................................................................. 11

Introduction
China's rapid growth has been based on the intense exploitation of the working
class, ruthless environmental degradation, and exports to the global capitalist
market. However, all three conditions required for China's capital accumulation
have been undermined. The contradictions of Chinese capitalism have led to a
falling profit rate, which at current trends may soon fall towards levels historically
associated with the Great Depression. A major economic crisis may seriously
undermine the political legitimacy of China's current capitalist regime.
During the first half of 2015 Chinese economy decelerated, despite economic
slowdown the Chinese market boomed. After fluctuating around 3000pts for years
the index surged and peaked to 5100 on May. By early July index fell back to 3500
points despite several attempts by the government and state owned enterprise to
save the market which wasted several trillion yuan. Recent turmoil reflects
fundamental imbalances of Chinese economy that may lead to a prolonged period
of crisis and instability.
We will be discussing neoliberal restructuring in next section followed by two
sections that provide a Marxist analysis of the contradictions of Chinese capitalist
economy. The last section concludes the possibility of the coming economic crisis.

China and Global Capitalism

The current global financial industry can be traced back to the late 20th century.
Responding to the growing working class militancy in Europe, North America,
Latin America and Japan, global Capitalist classes waged a counter offensive
which became known as neo-liberalism. To restore global capitalist order and
return the profit rate to levels sufficient to motivate capital accumulation.

Neo-liberalism in China
In China radical Maoist leaders were arrested and purged from the communist
party this allowed the capitalist roaders within the party leadership to take over and
consolidate power.
Millions of laborers in china acted as reserve army to the capitalists, with the help
of which entire manufacturing industries relocated from Western countries to
China.
Impact of neo-liberalism
Neo-liberalism invariably weakened the bargaining power of the Western and
Japan working classes and contributed to the recovery of profit rate in the core.
Though Neo-liberalism succeeded in restoring the global profit rate and
reestablishing favorable conditions of the capital accumulation. But it was
achieved at the expense of massive declines of living standards of people in most
part of the world especially in Eastern Europe, Soviet union, Latin America,
Africa, West Asia and Southeast Asia.

As a result of mass consumption was depressed. The expansion of the global

capitalist economy was threatened towards stagnation and financial instabilities.
China, Japan and Germany became dependent on their exports to drive economy.
To provide markets for the export led economies US stepped in as consumer of last
resort, led by debt financed expenditures, US household consumption became the
largest source of US economic growth and US acted as the main driver of global
economy until 2007.

Economic and Social Contradiction

Since the Economic Crisis of 2008-09, US and Europe have faced economic
stagnation and persistent financial instabilities and thus the Global Capitalist
economy has relied upon China as the leading engine of economic growth. In the
period 2005-14, China accounted for 35% of the global economic growth thus
becoming the centre for global capital accumulation whereas other economies like
India, US and European Union accounted for 12%, 7% and 5% of the global
economic growth in the same period.
Comparison of Contribution to Global Economic Growth (World Bank Data)
Period (years) China
1991-2000
18%
2005-2014
35%

US
24%
7%

EU
18%
5%

India
7%
12%

This visible rapid growth of Chinese Economy was due to the following factors:
Intense exploitation of Chinese Workers
Environmental Degradation and natural resources depletion and
Exports to Western Capital Markets
These factors were undermined since 2010 due to growing working class militancy
and labour unrest.
Chinas economy has been struggling due to declining exports to the western
economies which themselves are facing slowdown in their economies. The exports,
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which contributed to about 1/5th of Chinas economic growth earlier (before 200809), have become insignificant now.
Also Chinas domestic ecological systems are on the verge of collapse. It is facing
the worst aspects of pollution and environmental degradation. It is worlds largest
energy consumer, oil importer and carbon-di-oxide emitter. The environmental
regulations in this respect will inturn increase the cost of capital accumulation in
the future.
Growing Chinese workforce unrest has resulted in increase in number of protests
against the capitalist class. According to the China Labour Bulletin Data, there
were 656 workers strikes reported in 2013, which grew to 1379 in 2014 and
finally the number came upto 1626 strikes in first three quarters of 2015.

Falling rate of Profit

Chinese industrial profits have reduced to a large extent in the last four years due
to sluggish demand, devalued yuan, a tumbling stock market.
The profits declined by 8.8 percent in August as compared to the last year,
accompanied by the largest decline in coal, oil and metals according to the
National Bureau of Statistics. This was the biggest decline since the government
began releasing monthly data in October 2011.
Stock market plunge and currency devaluation are adding fuel to the fire in the
worlds second-largest economy as it has problems dealing with excess capacity,
sluggish investment and weaker manufacturing. The nations official factory gauge
slumped to a three-year low last month, while Bloombergs monthly gross
domestic product tracker remained below the governments 7 percent goal in
August with a reading of 6.64 percent.

The profits in coal mining declined by 64.9 percent in the first eight months of this
year as compared to the same time period in the last year, while oil and gas profits
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tumbled 67.3 percent, the report said. Ferrous metal smelting earnings declined by
51.6 percent.
This reduction in profits is due to the falling product prices, lower investment
returns and foreign-exchange losses, He Ping, an NBS official, said in an analysis
on the agencys website.
Maker costs, or the cost of merchandise as they leave the industrial facility,
drooped to a six-year low in August, as indicated by NBS. Costs have been
declining for over three years, the information appear.

"Extreme industrial facility door emptying and high loan fees are double toxic
substance for benefits," said Uwe Parpart, boss strategist at Reorient Securities in
Hong Kong. "The message to strategy producers ought to be impeccably clear:
ease financial arrangement radically to get in accordance with whatever is left of
the zero-loan cost world."

The Shanghai Composite Index turned around before misfortunes to close 0.3
percent higher at 3,100.76, paring its misfortune from a June 12 crest to 40 percent.
Commitments from venture returns fell in the midst of China's securities exchange
defeat, while conversion standard misfortunes rose "perceptibly" because of yuan
unpredictability, pushing the organizations' money related expenses up by 23.9
percent a month ago from a year prior, contrasted with a 3 percent drop in July, as
per the authority.

Head Li Keqiang has reacted to the slowest development in a quarter of a century

with arrangement facilitating measures including five loan fee cuts since
November, decreases in the measure of stores banks must hold as stores, a shock
cash degrading a month ago and expanded monetary backing.

"Old development drivers keep on sputtering and new development drivers are still
on the list of things to get," said Pauline Loong, overseeing chief at Asia-Analytica
Research in Hong Kong. "The Chinese national bank can drop the cost of cash all
it needs and scoop always money into the managing an account framework, yet the
issues confronting the Chinese corporate world are more about the absence of
clients than the absence of credit, more about indebtedness than illiquidity."

Profit Rate is defined as:

Profit Rate = Profit / Capital Stock
= Profit/Output * Output/Capital Stock
= Profit Share * Output Capital Ratio
Profit Share reflects the outcome of the class struggle and relative balance of
power between the capitalist class and working class.
In Short run, the output-capital ratio reflects the level of effective demand and
capacity utilization.
In long run, it may be taken as proxy for organic composition of capital.

Following data is collected to analyze profit rate:

Year

Profit Share

Output Capital

Profit rate

1990

0.608

ratio
0.835

0.257

1995

0.421

0.742

0.312

2000

0.389

0.671

0.261

2005

0.391

0.677

0.265

2010

0.384

0.630

0.242

2013

0.316

0.555

0.175

Profit Share is ratio of total capitalist profit to economic output(GDP). Total profit
is measured by total capitalist property income
Output-Capital ratio is ratio of economic output over capital stock
From above table we can see that Profit rate has been falling continuously. There
are various reasons for the same including exploitation of labor and resources.
Profit Share has been high during 1990s as privatization was taking place and
labor was available at cheap price so profit were high. But during 2000s
bargaining power increase for labors and profit share came down.

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Coming Economic Crisis?

China's new year headlines are all about the economy. Official plans call for slower
growth in 2016 and beyond, with the 7.5 percent growth target reduced to 6.5% .A
run of poor results in the manufacturing sector calls even that more modest target
into question. It is a worrying time for the global economy. While the euro area is
not yet out of its crisis, and the Fed could trigger an emerging-markets crisis by its
imminent rate hike yet another crisis might happen in China. The Chinese stock
market crash in summer 2015, which sent shock waves around the world, already
provided a taste of such a scenario.

The reasons for Chinas success are exploitation of workers and environment to
become the manufacturing hub of the world.
Changes that have happened over a period of time in China that indicate the
coming of economic crisis are:
Change in social structure that affect the chinas capitalist economy:
By this we mean that In 1990s due to privatisation there was a increase in
number of workers and also work force shifted from agricultural sector to
manufacturing sector, which decreased the bargaining power of labours but
with time again the bargaining power has shifted back to working class.
Output to capital ratio has declined due to economic contradictions such as:
- The high capital intensity of heavy industries
- They were not able to increase the level of exports

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If Chinas rate of profit continues to fall at the current rate then it will reach to a
profit rate associated with the US during the Great Depression, which eventually
will lead to economic and political instability.

Why it will be difficult to avoid economic crisis?

In earlier times crisis were handled by relocating old industries to new
geographical areas but now it will be very difficult to find a different
manufacturing hub with lower labor and environment cost. Hence, it will affect the
world economy also.

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