In the years leading up to the current economic crisis, the "rise of China" was the major subject of international discussion. Since the out break over a year ago of the economic crisis--now matching ever more clearly the question of China's "rise" to the disintegration of America's position in the world--this discussion has been transformed into one concerning whether China can break from its high-savings-rate, export economy and whether the US can break from its consumer-debt, import economy. There are two linked questions here. How well has China dealt with the current economic crisis (has its stimulus package worked well)? And, is it possible for the China to continue its "rise" to prominence in the global capitalist economy by changing its relationship to the US economy?
Reposted from The China Study Group.
An interesting article on economist Yu Yongding's view of the Chinese economy, China’s Yu Yongding Calls for Slower Sales of Yuan, suggests that China has to move away from its weak Yuan policy. While many commentators have said that the Chinese-US economic relationship--a relationship that Nail Ferguson calls Chimerica--has begun a dramatic shift during the current economic crisis, as this article points out China has actually increased its purchase of US Treasuries and its foreign reserves have risen in the last year. China's central bank makes these purchases to keep the Yuan from appreciating, damaging the export market. In China's shift from an economy in which exports play a very important demand role to an economy driven by internal demand, China has a long and difficult path to tread, and count me as one of the skeptics. As China keeps buying US dollars, it strengthens the "dollar trap," as Yu calls it, that has a hold on China: since China has such large US dollars reserves it can't sell its increasing stock of dollars without causing their value to drop. To escape this trap China must not only build internal investment but also use those dollars to invest abroad, something the Chinese state has begun to do. As the article points out, in May a state bank agreed to lend $10 billion to Brazil's state-controlled oil company in return for guarantees of fuel supplies (see also China's investment in Brazil's oil industry). Watch for more of these deals over the coming years. But these deals are dwarfed by China's over $2 trillion in foreign reserves.
In a much-commented upon article, neo-conservative Ferguson, who has not proven himself very adept at understanding economics in the past, argued that the US-China relationship must shift gradually, with China lowering its savings rate and increasing imports from the US. Ferguson calls on the Chinese to support the US economy. The Chinese state has been trying to increase internal demand for some time, and Ferguson isn't saying anything new--his article probably received so much attention because of the cute name he gave the relationship. In the year 2000, three "golden weeks" (seven days off work around Spring Festival, National Day, and Labor Day) were instituted in order to ramp up domestic demand. In 2008 the Labor Day Golden Week holiday (May 1st) was reduced to one day and replaced by traditional holidays instead (nationalism trumping class). At times the state has also manipulated banking rules and taxation to prompt consumer spending. China's several year project to build a "new socialist countryside" is also largely designed to stimulate internal demand by building the infrastructure necessary for rural residents to become bigger consummers--roads, electricity, etc.. Strangely, in effect Ferguson's article is a call for China to be more Keynesian so that the US doesn't have to go that ideologically incorrect route.
Danny Schechter in Al Jazeera "Can China save the world economy?" points to increased Chinese worry concerning the state of the US economy. Schechter notes that Chinese financial institutions lost hundreds of billions of dollars during the economic crisis and that Chinese state institutions lost even more, provoking many in China to blame America for their current economic woes. Schechter, unlike Ferguson, mentions the concurrent attempt by the Chinese state to diversify its international economic connections, mainly through a new focus on the global south, such as Brazil mentioned above. Schechter suggests that "China now has its own multi-national strategy that is global in scope."
John Ross is one of the optimists on China's economic recovery, defending both its stimulus package and its export-led economic strategy. In a Guardian article, Ross argues that three factors account for China's economic success: export-led growth, high investment in fixed assets, and strong macro-economic regulation. He argues that China's fixed investments have been used efficiently, though this is a matter of debate, and Ross ignores the environmental and human costs and the question of sustainability (capitalism, of course, isn't sustainable in the long term, but here I am more concerned with the short run). Moreover, Ross basically admits that the "socialist" nature of the Chinese state gives it more macro-economic control. Ross' Keynesian conclusion:
"For the last 30 years China has enjoyed the world's most rapid economic growth not by accident but because its policies conformed to the basic laws of economic development. Its economic stimulus package is so successful for the same reasons."
Larry Elliott takes the pessimistic view, calling China's stimulus efforts a "programme of reckless expansion." Like Ross, Elliott notes that without China's stimulus the world would have had no economic growth at all in the second quarter of this year. At question is whether China is creating yet another bubble or if its investments will lead to long-term growth. Elliott assumes the former. Key indicators are the rising price of realty and growth in the stock market. According to analysts at the Royal Bank of Scotland, "around 20 per cent of new loans [a major part of the stimulus package] in the first half may have found their way into the equity market and another 30 per cent into property and other financial assets, helping to inflate unsustainable asset bubbles." The stock market had risen over 60% this year until the state indicated that it was worried about asset inflation. Efficiency of investments must be questioned when one considers that there are plans to expand China's highway network--a big part of the stimulus package--to 180,000 KM (the US has 75,000 KM) in the next few years when China only has 38 million passenger vehicles compared to 230,000 million in the US. As an article by Jamil Anderlini points out, this new investment has primarily gone to state-owned industries, increasing their dominance within the economy and reversing earlier trends. Liberals (the article, for example, quotes Wu Xiaobo) decry this shift, of course; but again, it is in part due to the state's ability to intervene in the economy that China is in a better position than the US to ameliorate the social and economic effects of the crisis.
An August 25th article by Yu Yongding entitled "China's Stimulus Shows the Problems of Success" argues that the stimulus has certainly helped the economy to grow faster than it would have otherwise but that it also is creating new problems. China has had a problem of overcapacity for some time, and this has been exacerbated by the recovery package even though the Chinese state has attempted to design the package to avoid this problem (and has recently moved to reign it in). And, as others have mentioned, asset bubbles are forming as well, indicating that stimulus funds are not being well invested. Some seepage is to be expected, of course, the question is how large is it. On the other hand, Yu considers the stimulus package appropriate for China's situation: China is experiencing an second-order crisis that expresses itself in a fall in exports. Yu Concludes:
"To achieve a sustainable rebound, China needs to strike a fine balance between crisis management and structural reforms. If China fails to tackle its structural problems, including its export dependency, high investment rate and wide income gaps, growth is unlikely to be sustainable. The current crisis has provided China with a good opportunity not only for structural adjustment but also for institutional reforms."
Michel Husson looks more deeply into the capitalist roots of the crisis, questioning it ability to reach any sort of sustainability. As Husson points out the US model only worked in recent years by masking its disequilibrium (between consumption and production) through its complex economic relationship with China, and this has been exposed during the economic crisis. In order for the US economy to reach pre-crisis levels of consumption, even bigger bubbles would have to be created. The question is whether China will continue to finance the US. Husson rightly concludes that:
"the tensions between the will to maintain the existing order and the need for a profound reorganisation at the economic, social and environmental levels open a long period of instability and uncertainty. In essence, capitalism has no alternative - acceptable in its eyes – to the arrangements which led to the crisis, in such a way that the real exit from crisis passes through an alternative to capitalism."
Even if, as in Ferguson's dream world, China is able to ramp up internal demand, what if that demand is not met by imports but by internal production? This leaves the US in a worse position in the long run, as it means the Chinese can begin move away from financing US consumption without increasing US production. The capitalist disequilibrium of the US economy will then be very difficult to paper over. While I am skeptical that China can make this transition smoothly--the US certainly can't--it seems to be attempting such a shift. Adding to the skepticism, while the Chinese have been trying to increase domestic demand it has actually decreased as a percentage of GDP in recent years, creating a contradiction of over-accumulation/under-consumption. And despite the stimulus package, Zhang Hong points out in the Guardian that "domestic consumption remains flat, leaving the State-directed investments as the major pillar for the country's GDP. In the first half of the year, state-directed investments contributed 6.2 percentage points of the 7.1% GDP growth." This is another manifestation of what Robert Brenner calls the "economics of global turbulence."
Reposted from The China Study Group.