Scenarios of the Coming Crisis: A Response to Aufheben’s “The Crisis: Afterword”

Scenarios of the Coming Crisis: A Response to Aufheben’s “The Crisis: Afterword”

In China, official politics is a game of arcane signals. Predicting tectonic shifts in policy requires that one read the seismic shudders buried beneath terse statements issued by poker-faced officials. Slight changes in terminology may hint at sliding allegiances or new waves of repression. The most significant signals, however, take the form of interviews with anonymous oracles—almost always an “authoritative person”—their words propagated by the state’s highest media organs without attribution. The more such oracles speak, the greater the magnitude of the coming “intervention.” Such proclamations also often signal internal disagreements within the seemingly monolithic Chinese Communist Party (CCP). With the slowing of economic growth, such disagreements have been exacerbated, as the top leadership debates the future of the economic reforms that have led China into a commanding role within global circuits of capital accumulation.

Over the past year, an “authoritative person” has been interviewed three times for front-page stories run by the People’s Daily. The first two times preceded large interventions into the turbulent stock market.[1] In the third such extended interview, the “authoritative person”—speculated to be a key supporter of president and party leader Xi Jinping—was quoted as saying, “Trees cannot grow to the sky. High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth and even wipe out ordinary people’s savings.”[2] Though each of these interviews has sought to clarify policy decisions, the third offers the strongest statement to date, essentially arguing that the economy’s reliance on a series of debt bubbles is only worsening its prospects for a harsher, systemic crisis when these bubbles burst. Its suggestion is essentially to tear up the economy at its foundation, allowing a wave of firm closures to reduce overcapacity and liquidate “zombie” enterprises. The hope is that stimulus can be replaced with genuine demand, even if this means a period of “L-shaped” economic flatlining, as the market reworks the foundation of the economy.

In such interviews, the CCP’s officially-sanctioned oracle takes on an extremely pessimistic tone when it comes to the present state of the Chinese economy and its future role within global capitalism.  The irony is that such extreme pessimism, coming from the very helm of the Chinese state, can be counterposed to an economic optimism on the part of many “analyses” of China originating within the leftist milieus of the west. Despite there being little evidence that the Chinese economy has begun to shift away from its unsustainable investment-driven model of economic growth, many such analyses still cling to the belief, cultivated in the years of double-digit growth, that China will adopt the role of a global superpower and sustain global capitalist accumulation for years to come.

In “The Crisis: Afterword,”[3] the British communist collective Aufheben makes just such an argument as they return to their two-part series on the economic crisis known as the Great Recession. The group’s original series—written while China was still maintaining growth rates of around 10%—was quite optimistic about the ability of capitalism to snap back from the crisis, suggesting that it was only a momentary pause in the “long upswing in global capital accumulation since the 1980s,” and that capitalism was beginning “a new phase in the long upturn.” In the “Afterword” they admit that they were somewhat overly optimistic about the economic recovery in the West, but that if you looked at capital accumulation more broadly and with special attention to China and emerging markets, “there has […] been a rapid economic recovery.” A key empirical data point to support their argument is that China’s nominal GDP grew over 80% between 2008 and 2012.

China’s slowdown since 2014 would appear to be problematic, then, and the “Afterword” raises the issue of the slowdown (which they call an “overcorrection”), only to sidestep its implications for their original argument. In fact, the “Afterword” shifts at this point from a discussion of Aufheben’s position to the “rather rosy” assumptions about the Chinese economy of “most mainstream economic forecasters.” Despite attending to the slowdown of the Chinese economy, Aufheben ends by suggesting that the movement of Chinese capital abroad (for infrastructure projects such as the “New Silk Road,” which will make it easier to obtain resources)[4] will likely help to maintain global capital accumulation. This implies that their original argument—that the Great Recession was merely a pause in “the long upswing in global capital accumulation since the 1980s” —remains largely correct.

We see this argument as untenable. In contrast to the sustainability of the “long upswing” narrated by Aufheben, we contend that the Chinese economic slowdown is not an “overcorrection,” but a contradictory set of responses to the problems of overinvestment, bad debt, and overcapacity. The portrayal of the economic slowdown as an “overcorrection” is only possible if Chinese growth is seen as primarily export-driven—limits to growth in exports can therefore be overcome by growing domestic consumption and the absorption of new growth sites in places like Central Asia. But Chinese economic growth has not been primarily export-driven. Instead, rising levels of exports and a trade imbalance are side-effects of an investment-driven strategy that results in overcapacity (meaning too many factories producing too many goods for the market to handle).

This investment-driven growth strategy compels financial repression (especially with respect to low, sometimes negative, deposit interest rates) that transfers household wealth into state-bank investments.[5] China’s high savings rate (both its gross savings rate and household savings rate)[6] feeds the investment-driven growth, but it also reduces effective demand, making investment-driven growth synonymous with low consumption rates and overcapacity. The goods that are produced largely flow into the global market as exports since domestic consumption cannot keep pace. Underconsumption thus appears as if it were export-led growth.

Overcapacity and overinvestment are things that have been openly discussed within the Chinese state since the late 1990s, before the more dramatic rise of the trade surplus starting in the mid-2000s and well before the rapid growth in investment in response to the global financial crisis. In fact, the idea of transitioning to a consumption-based economy became widely discussed from the early 2000s, and the problem has remained unsolved to the present. To cut overcapacity means pulling back on investment and allowing bankruptcies to weed out productive capacity. That would mean a temporary drop in GDP growth, potentially even negative growth. The hope would be that, over time, consumption would begin to take over from investment, and the savings rate would drop. This would initiate the economic transition to a consumer-driven economy. But this was never really tried during the boom period of the 2000s, when higher growth rates would have cushioned the pain in a way that is less possible in the present moment, were it to be attempted. Instead, whenever the economy began to slow over the last decade, the Chinese state opened the flow of cheap money and ramped up fixed asset investment (both private and public). This only increased overcapacity and total debt.

The response to the 2008 crisis was no different, except in scale: fixed asset investment and debt spending skyrocketed, exacerbating the existing problems of overcapacity. Total debt rose from 158% of GDP in 2007 to 282 percent in 2014,[7] including both the debt of local governments and corporations. At the same time, debt spending became increasingly inefficient, with the amount of economic growth added per yuan of debt continuing to diminish. While investments before the 2008 crisis led to productivity gains, adding to China’s economic growth, since 2008 productivity gains have slowed considerably, with growth driven by little more than capital investment. For the present slowdown in China to be an “overcorrection,” one would have to show that debt spending as a percentage of GDP is dropping markedly, beyond what is necessary to deal with overcapacity. Not only is that not true, but the growth of debt has actually increased. This is not an “overcorrection”—there has been no correction at all.

Along the way there have been some countervailing tendencies, but they have all been short term. The wealth effect of rising real estate values into 2014 helped raise consumption among the urban middle class. Local governments pushed the development of the real estate sector, as much of their revenues came from selling land to developers. At the same time, as the deposit rate for savings was so low, many households used the rapidly rising values of real estate as a way to increase their wealth, buying two or more homes and leaving them empty. But the housing market, too, was unsustainable and quickly overwhelmed by overcapacity.

This led to the rise of the Chinese stock market bubble. The Chinese state began to heavily promote IPOs in the summer of 2013, and investment in the stock market as a whole in the summer of 2014, soon after the real estate bubble burst. They were trying to solve two problems. First, raising funds directly through the stock market would allow corporations to shift borrowing away from unsustainable bank loans, which were backed by the state. Second, since households made so little from bank deposits and the wealth effect of the housing market was no longer effective, pushing households into stocks would help build household wealth and, it was hoped, consumption as well. This failed dramatically in the summer of 2015.[8] The shock of the 2015 stock market crash had to happen sooner or later. But in response to this most recent collapse, the state has again ramped up investment to prevent GDP from dropping through the floor, and to keep at bay the social unrest linked to unemployment. Most new debt is being used unsustainably to pay interest on old debt or to finance operations,[9] making debt servicing increasingly difficult. Despite some growth in domestic demand, there is no real indication that the Chinese economy is rebalancing.

How then are the global debt-fueled infrastructure investments like the “New Silk Road” going to save the Chinese economy and thereby global capitalist accumulation? Aufheben notes that these investments will allow China to gain access to global resources. But what are they going to be used for? The China commodity boom—driven in large part by China’s massive building projects—of 2003-2013 is over and unlikely to return. How is infrastructure spending going to get China out of its overcapacity problems? Even ignoring the problem of diminishing returns on investment, there is the problem of financing these investments. China’s foreign reserves have been shrinking at a rapid pace over the last year. This has slowed recently—mainly because the US Federal Reserve has put interest rate rises on hold—but it looks as if the yuan is again under a great deal of pressure. Dwindling foreign reserves make massive foreign investments like the “New Silk Road” much more difficult to sustain.

On the whole, we are far more pessimistic than Aufheben concerning China’s ability to maintain economic growth rates and fuel global capital accumulation. There are five possible scenarios:

Scenario One: successful transition with rapid increase in consumption. While the Chinese state has been talking about this for over a decade, there is little indication that this has been happening. And the most opportune time for such a transition (when growth rates were high and the working age population growing) is long past.

Scenario Two: successful transition with a period of recession, which wipes out overcapacity, and a slower increase in consumption. While slightly more possible than the most optimistic scenario, this is still unlikely to succeed. This would take a simultaneous cutting of overcapacity while increasing labor’s share of GDP, and these shifts move in contradictory directions. China’s very high and growing inequality makes this almost impossible.

Scenario Three: long-term stagnation (amounting to failed transition and the middle-income trap); growth rates drop but not below 2%, leading to rising unemployment and continued inequality; consumption as percent of GDP slowly increases but is unable to lead to an economy that grows fast enough to move China into the status of a high income country. This scenario is quite possible, and it would drag heavily on global capital accumulation.

Scenario Four: economic crisis and recession, running into stagnation. There are many indicators that the economic crisis in China has not reached bottom: debt is still rising and overcapacity has not been cut. The yuan is still under a lot of pressure, and that will only increase once the US Federal Reserve begins to increase interest rates again. So this scenario is also quite possible. Such an economic crisis would lead to rising unemployment and social unrest.

Scenario Five: collapse and depression.

Only under the first two scenarios would China be able to keep playing an important role in maintaining global capital accumulation. But these scenarios are only visible to those wearing rose-tinted glasses. In reality, the countervailing factors make these potentials extremely unlikely. Looking at the present situation, the third and fourth scenarios are most likely, meaning that China will become a greater drag on global capital accumulation, on the one hand, and that social unrest in China will likely increase, on the other. The fifth scenario would entail a massive mismanagement of these problems on the part of the Chinese elite. Though less likely than the third and fourth scenarios, it remains more probable than the first and second. The result of such a collapse, however, would be far too chaotic to allow for any speculation here.

[1] “China’s Anonymous Oracle Signals Shift from Debt,” Bloomberg (May 9, 2016),

[2] “China debt-fueled stimulus may lead to recession – People’s Daily,” Reuters (May 9, 2016),



[5] The Chinese state has put a cap on the interest that banks can offer household savers. This repression of interest rates means that banks have access to cheap money that should be earning households higher interest rates. This helps feed the investment-driven form of growth in China.

[6]; Matthew Johnston, “High Debt and Savings Rates Hinder China’s Economy,” Investopedia (Jan 6, 2016) The “gross savings rate” includes the savings of households, the government, and corporations.

[7] McKinsey Global Initiative, “Debt and (Not Much) Deleveraging,” (Feb 2015),

[8] “Papering over crisis: the Chinese stock market plunge and the real economy,” Chuang (Jul 22, 2015),

[9] Morningstar, “Is China Heading for New Financial Crisis?” (Jun 20, 2016),

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