THE CLAIRE FOSS JOURNAL


STATE CREDIT GENERATION: CHINA'S EXAMPLE


The China-critical New York Times admitted in a front-page article in January 2003, that China has maintained a "robust growth of 8%," thanks to "a nearly 25% increase in state-directed investment" in the year 2002. "The Chinese government, state banks and companies and foreign investors spent $200 billion in the first 11 months of last year on basic infrastructure projects.... The scale of construction is extraordinary" and even "dwarfs the New Deal and the Marshall Plan." The Times went through the amazing catalogue of "mega-projects" going on in China today, including the ongoing $30 billion Three Gorges Dam project; the $60 billion North-South water transfer project just launched by the government; the creation of a national superhighway system; the construction of new subway systems in 10 major cities; the building of the Transrapid line in Shanghai; the construction of some 9,500 kilometers (5,800 miles) of railroads over the next 2-3 years, and so forth.

Indeed, China's use of state-directed infrastructure investment as a locomotive for rapid economic development, provides a crucial, living example of the kinds of policies needed to bring the world out of a threatened "New Great Depression" today. These are exactly the policies for productive credit generation and large-scale infrastructure investment, that Lyndon LaRouche and his collaborators have been advocating for many years.

China's success is not only a prime example of the "Super TVA" program LaRouche is proposing for the U.S.A., and of the Land-Bridge policy for an economic boom in Eurasia, but also underlines a key point Helga Zepp-LaRouche has been making in her dialogue with the German government, on the necessity of reviving the conception of the "Lautenbach Plan."

Put very simply, the Chinese government has created the extra money and credit needed, to finance the country's vast economic buildup! China's enormous infrastructure investment has been made possible by what Chinese economists call an "expansive monetary policy": In recent years the People's Bank of China—China's central bank—has been expanding the effective supply of money and reserves of credit (the monetary aggregate known to economists as "M2"), by about 15% per year. That means the money supply has been growing almost twice as fast as the Gross National Product.

According to the simplistic way of thinking, now common even among so-called economic experts, such a giant monetary expansion should necessarily lead to inflation and currency instability. But reality has shown exactly the opposite: Despite the rapid monetary expansion, overall prices in China have remained stable or declined, while the Chinese yuan (RMB) has become one of the "hardest" currencies in the world.

How can one account for this paradoxical result? The answer, again, is essentially simple: By channeling a large part of the monetary expansion into credits to the productive sector, including agriculture and industry as well as infrastructure, the Chinese government insures that the supply of useful goods and services, produced by the economy, has continued to expand even faster than the effective demand. Parallel with this quantitative expansion of production, the absorption of modern technologies and increasing qualification level of the Chinese labor force have caused overall industrial productivity to grow at over 4% per year. The result is an overall deflationary tendency in domestic prices, at the same time as the volume of money and credit in the economy continues to grow rapidly.

In short, the monetary and debt expansion in China is more than adequately "covered" by the physical expansion of China's economy, in the form of increased production of tangible goods, infrastructure, and necessary services, without the formation of a giant speculative bubble of the sort we have seen in the United States and Europe over the last 15 years.

The monetary expansion itself takes mainly the form of increases in the effective supply of credit, from the People's Bank of China, above all, to the so-called "Big Four" commercial banks, which are all state-owned: the Bank of China, the Construction Bank of China, the Agricultural Bank of China, and the Trade and Industry Bank of China. In addition, a very important role is played by the China Development Bank (CDB), formerly known as the State Development Bank, which is a ministerial-level agency supplying multibillion-dollar credit directly to industries and infrastructure projects. The CDB, which is financially supported both by the Chinese Finance Ministry and the People's Bank of China, has many common features with the famous Kreditanstalt für Wiederaufbau (KfW) in Germany. Indeed, Chinese economists have carefully studied the key role of the KfW in the West German "economic miracle" of the postwar period.

Another key feature of China's credit policy is maintenance of a low rate of interest, currently 1.5-1.6% on suitable categories of loans. In addition to the direct credit expansion via the People's Bank of China, the Chinese government has recently been supporting its high level of direct investment into the economy, through a moderate budget deficit of about 3% of GDP. This is being financed through the issuance of about 100-150 billion RMB per year in bonds, compared with about 1 trillion RMB in yearly tax revenues. The total accumulated government debt, in the form of bonds, now amounts to only about 17% of the GDP. This government debt rests on a very solid basis, in the form of a rapidly growing tax base provided by the expansion of China's real economy.

The Infrastructure Component

The channeling of new credit into basic infrastructure investments, on the order of $200 billion per year, is a key feature of China's anti-inflationary credit expansion policy. Infrastructure construction—including transport, energy, water systems, communications, etc.—is laying the foundation for the rapid, sustained expansion of China's economy as a whole, while at the same time stimulating employment and production in industrial sectors supplying the projects themselves, and opening up previously backward regions and resource-rich areas for development.

In a typical case, the financing of a major infrastructure project, once approved by government agencies, is pulled together from three main sources: First is direct state investment, from the budget of the Finance Ministry. Typically, this amounts to about one-third of the total financing of a project. Second, loans provided by the state-owned commercial banks and the so-called "policy banks," above all, the China Development Bank, which operate under direct government control. These credits are granted to agencies and (usually publicly controlled) corporations that build and operate projects. Third, funds raised by local authorities and corporations involved in the projects from domestic and foreign financial markets, for example, in the form of bonds. The right to issue bonds is tightly regulated and granted only to a limited number of corporations and other entities under strict conditions. An illustrative example is the issuance of bonds by the Three Gorges Dam Corporation, a state-controlled corporation created to build and operate the giant Three Gorges hydroelectric and river-control project. Similarly, railroad-building corporations have been issuing bonds.

The Chinese government itself has also been raising additional funds for infrastructure investment, through the issuance of bonds, sold mainly on the domestic market. This includes specific Construction Bonds.

It should be obvious, that apart from some aspects of secondary importance, there is nothing in the methods just described, which could not be used in principle by every other developing nation in Asia, or the world—as well as by industrial nations themselves.

Exports and Technology Transfer:

The KfW Model

To finance exports of investment goods to Asia, in the order, potentially, of 5-10 times the level of Germany's present exports to the whole world, it is not necessary to "reinvent the wheel." There is already available an excellent historical model: the role of the Kreditanstalt für Wiederaufbau (KfW) during the 1960s and 1970s, in providing a "credit locomotive" for the expansion of German exports to developing countries. Crucial to the success of this model, was the fact that it was based on a long-term strategy for Germany's participation in real, sustained economic development in the partner nations, rather than the short-term "market" thinking predominant today.

In the 1960s, the KfW combined the functions of a development bank and an export credit bank. Using its extensive experience with the reconstruction of the West German economy after World War II, the KfW financed or co-financed countless projects for energy, water, and transport infrastructure, and development of agricultural and industrial production in Third World countries. Some of the most famous projects included the Rourkela steel plant in India, the nuclear power station Atucha I in Argentina, the Keban Dam in Turkey, the Lome Harbor in Togo, the Cabora Bassa hydroelectric project in Mozambique, the Roseires dam in Sudan, and others. There were countless smaller projects, from road-building and irrigation systems, to manufacturing plants.

In the 1960s, about 50% of the capital assistance went to India, Pakistan, Turkey, and Egypt, with the rest going to developing nations, including South Korea (then a "developing nation") and other countries in the Far East. In addition, the KfW financed projects for mining and raw materials processing projects, which were important for securing Germany's supply of raw materials.

Parallel with the issuance of credits for development projects, the KfW provided credits to foreign recipients for import of equipment produced by German companies, working closely with the Hermes state export-import bank. Supported by KfW credits, German companies built power plants, cement, paper, or fertilizer plants in developing countries, as well as "threshold countries" such as Mexico, South Korea, the Philippines, Pakistan, or (at that time) Spain and Greece.

Toward the end of the 1960s, Brazil became an increasingly important partner of the KfW. Between 1961 and 1970, the volume of export financing by the KfW grew from 160 million to over 1 billion per year. Unfortunately, from the late 1960s on, the type of development strategy, exemplified by the KfW and similar institutions in a number of countries, encountered an increasingly hostile international environment, finally leading to their virtual marginalization. The problem was created by a shift, in the United States and Great Britain, away from a postwar emphasis on productive investment, toward increasingly radical anti-industrial economic and financial policies. These led to the August 1971 collapse of the original Bretton Woods fixed-exchange-rate world monetary system, and the transition to the present, speculation-ridden "floating-exchange-rate" system, which rendered long-term international investment and trade agreements virtually impossible.

The same anti-development policies, exacerbated by the austerity policies imposed upon the developing sector by the International Monetary Fund (IMF) and international banks, increasingly, since the manipulated "oil crisis" of the mid-1970s, led to the financial ruin of virtually all the developing nations. At the same time, the United States government adopted the neo-Malthusian ideology of "population reduction instead of development," taking an openly hostile attitude toward transfer of modern technology to developing nations. In particular, the combination of financial crisis and American pressure, effectively shut down most of the long-term nuclear and other technology agreements that had been reached between Europe and developing sector nations such as Brazil, Argentina, Mexico, Iran, India, Pakistan, and many others.

As a result of the defeat of the attempted economic alliance with developing countries, the flow of exports from export-oriented European countries concentrated more and more toward the advanced sector nations themselves, especially the U.S.A., which, fueled by the inflationary financial bubble, became the world's "importer of last resort." Now that the bubble has collapsed, and a new "Great Depression" is staring us in the face, an entirely new situation faces the world.

The present situation, while fraught with great danger, also poses very great opportunities for a positive shift in economic policies. First, the defective, post-1971 world financial order is now undeniably bankrupt, as reflected in the sheer unpayable accumulation of debt and speculative financial obligations, with the U.S. financial system itself in the center of the coming storm, and the necessity of fundamental reform—the "New Bretton Woods" conception of Lyndon LaRouche—is becoming more undeniable each day. With this comes the rising pressure, internationally, to somehow revive the features of the original, postwar fixed-currency-exchange system under which much of the world had once prospered, into the 1970s.

Second, a number of developing countries of Asia—in the forefront, China—have insisted on their economic and financial sovereignty vis-à-vis the domination of the IMF and other international financial institutions. China, in particular, has "broken the rules" by adopting a policy of internal productive credit generation to finance a sustained infrastructure-centered economic boom, providing a successful example to the whole world, of the "New Deal" methods of economic recovery. Moreover, steps are under way, in the so-called ASEAN+3, consisting of the Southeast Asian nations plus China, South Korea, and Japan, to create a new, alternative framework for regional trade and investment, possibly including a proposed Asian Monetary Fund.

Third, the recent emergence of a new "triangle" France-Germany-Russia—in collaboration with China, India, and other key Eurasian nations—which came together around the search for a political alternative to the Bush Administration's Iraq war drive, opens the door to developing the economic dimension of that alternative.

Here there is a real chance, that a chain of already-existing "triangles" and other collaborative combinations of Eurasian nations might coalesce, to make the policy outlined in this report, into reality.

From the article:

Asia Can Be the Motor of Economic Recovery for Europe.

by Jonathan Tennenbaum