Karl Marx is back in China, and the philosopher is arguably bigger than ever.
Yes, yes, Asia’s No. 2 economy is barreling ahead on the free-market highway. Beijing has even gotten hip to the private-equity craze, buying a $3 billion (Rs12,300 crore) stake in Blackstone Group LP. Now that, as Milton Friedman might say, is capitalism.
It’s interesting, then, that China’s markets in some respects are looking more like the kinds envisioned by Marx than by laissez-faire champion Friedman.
Mao Zedong fancied himself an heir to Marx. Today, when investors look at China’s 11% growth and domestic reforms, the Marxist theory China subscribed to, back in the 20th century, seldom comes to mind.
And were Marx to visit modern-day China, he might be distressed to see how the rich are flourishing and a sizeable portion of gross domestic product comes from private companies, while the poor need to pay for education and health care. China also hopes one day to arrive at a system where markets control the prices of goods, production and labour.
Yet something about China’s spectacular stock rally has Marx written all over it.
One of the German-born philosopher’s main worries about free markets was a “reserve army of labour,” a huge labour pool that would prevent wages from rising and benefit only corporations that exploited workers. In today’s China, a reserve army of individual investors is stepping forward to boost stock prices.
Perhaps it’s not surprising that investors jumping into Shanghai’s markets ignored Alan Greenspan’s recent prediction of a “dramatic contraction”. It’s doubtful many of the hundreds of thousands of Chinese opening trading accounts each day have heard of the former Federal Reserve chairman—or care what he thinks.
They’re too busy engaging in their own interpretation of Marx’s belief that a worker’s revolution is best for society. Only this revolution is more about China’s poor masses catching up to the nouveau riche in Shanghai, Beijing and Guangzhou.
Would Marx really object? After all, if China’s stock rally increases household wealth for labourers and makes the nation more egalitarian, doesn’t the end justify the means? Would he object to workers making huge profits with little actual work, instead of the other way around?
Marx might mind once China’s stock bubble bursts, taking away the hard-earned wages of the country’s modern-day equivalent of peasants.
World’s hottest casino
What’s so amazing about the surge in the benchmark CSI 300 Index is that everyone knows it’s a bubble and regardless, fresh money flows into shares. China’s companies may lack transparency, but its investors sure don’t. Quite transparently, they’re rolling the dice in the world’s hottest casino.
Just as a 9.2% plunge on 27 February was seen as a buying opportunity, Monday’s 7.7% drop merely brought new demand into the market. It’s a bubble, and legions of Chinese workers opening investment accounts don’t care.
Critics of Marxism—Nobel laureate Friedman among them—argue capitalism is a more efficient means of creating and distributing wealth. They believe the gap between rich and poor in industrializing economies, which so troubled Marx, is a temporary phenomenon that capitalism eventually fixes.
The irony is that Chinese workers are using the ultimate expression of capitalism—stock speculation—to narrow the gap between the haves and the have-nots. In other words, they’re using Friedman to get closer to what Marx wanted.
Capitalism or socialism?
Officials in Beijing may do the opposite. There can be little doubt China’s government, armed with $1.2 trillion of currency reserves, will step in to stabilize the market if it really crashes. Hong Kong did it in the late 1990s with few lasting side effects. And Japan rarely shies away from financial socialism when the Nikkei 225 Stock Average plunges.
Expect similar steps in China. For now, new investors hoping to strike it rich are propping up stocks like some huge, multi-million-person pyramid scheme. Such manias work out for those who get in early. It’s those who join late that often experience big losses. And make no mistake—this will end badly for many.
Chinese authorities want it both ways—capitalism and socialism. They want the stock bubble to stop inflating; they don’t want it to explode, slamming business and consumer confidence. Hence the timidity one observes in the halls of Chinese power.
China may raise lending and deposit rates at least once more this year to cool investment and curb asset bubbles, according to a survey of 16 economists by Bloomberg reporter Nipa Piboontanasawat.
China must act more forcefully if it’s going to stop money from record trade surpluses from fuelling stock or property bubbles and overcapacity in manufacturing. That’s especially true when inflation is outpacing after-tax returns on bank deposits, encouraging the speculation that’s driven the CSI 300 70% higher this year.
None of this is likely to stop China’s reserve army of investors from betting it all in Shanghai. It’s not clear that either Friedman or Marx would approve.