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From The Socialist newspaper, 2 September 2015

China crisis: What will this mean for the world economy?

The contraction of the Chinese stock exchange has sparked justified fears that the world economy could be in for a repetition at a certain stage of a crisis with similar effects to the 2007/2008 catastrophe. The Chinese government spent $200 billion trying to prop up the market after the worst fall since 2007. The Shanghai Composite Index dropped 8.5% in one day.

The repercussions of China's "black Monday" reverberated around the world with huge swings in the world's stock exchanges. 74 billion was wiped off the stock market in Britain. Lawrence Summers, former US Treasury secretary, tweeted "we could be in early stage of a very serious situation."

The devaluation of the yuan, while not by a huge amount, raised fears of the possibility at some stage of currency wars with China's competitors.

The Chinese economy is 15% of world production, but has contributed up to half of the world's economic growth in the last few years. Even before this latest crisis, the slowdown in Chinese growth rates compared to recent years has had a severe impact - especially on the world's 'emerging markets'.

They have seen their commodity export markets savagely cut and face protracted crises, with big political repercussions shaking governments in Africa, Asia and in particular Latin America.

Repercussions

For example Dilma Rousseff, re-elected president of Brazil less than a year ago, now has only 8% support in the polls and faces mass protests as a result of the economic crisis there. There are calls for her impeachment, especially from the right.

The Chinese stock exchange is unlike any other in the world. It is an attempt by the state to tap into the savings of the Chinese people, mostly the 'middle class', to try to continue financing growth in order to stave off political upheaval, even revolution. This has now blown up in its face.

The effort to bolster the stock market with huge government buyouts has failed and the worry now is, as the Guardian said, "China sneezes and the West faces up to an empty medicine cabinet".

In other words the weapons that world governments had to ameliorate the crisis of 2007 have now been mostly used up.

For example, vast amounts of money - quantitative easing - were pumped into the world's economy by governments following the 2008 crisis. But while this led to booming stock exchanges it did not lead to a strong recovery in the real economy.

Interest rates have flatlined and there is generally little scope for cutting them around the world to boost investment. They are scratching their heads to work out what to do if the bottom falls out of the world economy again.

Repeat crisis?

China partially overcame the crisis of 2007/2008 by building up debt. This more than quadrupled over the last seven years. There were 28 million unemployed in China in 2007. If this had continued to rise it would have had revolutionary implications.

Action by the state meant that huge investment was ploughed into the economy. Investment reached 44% of the national income in 2014, resulting in massive overcapacity. World demand levels were too low to absorb China's capacity. So its latest strategy has been to stimulate domestic consumption.

Will the latest developments result in a new 2007/2008? Probably not in the short term. Capitalism is a blind system, and elements of a new crisis are already there - debt is still being piled up. We are already in a "psychological downturn" according to one analyst, with a real fear for the future among the world's capitalists.

But the Chinese regime will not want to allow the bottom to fall out of the economy. It will probably again resort to the piling up of debt, kicking the can further down the road. Therefore there is unlikely to be an immediate crisis like 2007.

Although the real Chinese growth rate (still officially 7%) is likely to be currently below 5% or even lower. This is well below the huge growth rates of the past.

These economic developments are not taking place in a vacuum. There is a background of protests, and more willingness by Chinese people to openly criticise the regime.

In an expression of that, the head of a Shanghai exchange that trades in metals was captured by protesters and handed over to the police!

The Tianjin explosion which killed 114 people because of the unsafe storage of dangerous chemicals near residential areas provoked massive public anger. Any incident could trigger mass protests.

What can be done to tackle the problems? In China the government can cut interest rates further. This is not an option elsewhere in the world as they are effectively zero.

The US Treasury has in fact talked about raising interest rates. Larry Summers has argued against this. It could be a mistake along the lines of 1937, when recovery from the great depression was choked off, threatening a new downturn.

This was avoided by the turn to military production with World War Two looming.

The world economy is now like the Titanic without lifeboats. We are in a period of economic instability and low growth, which can for example throw Osborne's spending plans awry.

Contagion

The Chinese regime has been able to survive the crises so far because of its peculiar character, with huge state involvement in the economy. However the slowdown in China has already produced a collapse in the emerging markets.

It is only a matter of time before this is repeated in the advanced economies.

Symptomatic of the crisis are the huge cash piles sitting in the bank accounts of big companies. In the US between $1 trillion and $2 trillion of corporate profit is unused. Profits have not been invested in 'growing' the world's economy.

This alone shows the need for an alternative to capitalism. A democratic socialist planned economy can eliminate the chaos of capitalism with its ruinous cycle of boom and bust.

Turmoil in the world's economy will mean political upheavals and a questioning of capitalism even before the next major economic crisis.

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