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Wednesday, December 14, 2011

The Chinese Puzzle

Whither China?
was the name of a widely circulated pamphlet authored by the respected Anglo-Indian Marxist author, R. Palme Dutt. Writing in 1966, with The People’s Republic of China (PRC) in the throes of the “Cultural Revolution”, the pamphlet sought to shed light on the PRC’s tortured road from liberation in 1949 to a vast upheaval disrupting all aspects of Chinese society as well as foreign relations. To most people – across the entire political spectrum—developments within this Asian giant were a challenge to understand. To be sure, there were zealots outside of the PRC who hung on every word uttered by The Great Helmsman, Chairman Mao, and stood by every release explaining Chinese events in the People’s Daily, Red Flag and Peking Review. A few Communist Parties and many middle-class intellectuals embraced the Cultural Revolution as a rite of purification. Yet for most, as with Palme Dutt, the paramount question remained: Where is the PRC going?

Today, forty-five years later, the question remains open.

The cultish followers of Mao have mostly gone on to their life’s work, though some still uncritically defend every aspect of Chinese Communist Party policies during Mao’s chairmanship.

But the PRC that we know today is a vastly different country from the country worrying R. Palme Dutt in 1966; yet it is one that is just as difficult to comprehend. In place of the economic stagnation of the Cultural Revolution period, the contemporary Chinese economy enjoys one of the highest consistent growth rates in the world and counts as an industrial giant well on its way to challenging the USA in annual national product. The economic autarky of the Mao period has been replaced with a massive effort to trade globally. And state enterprises and common land ownership are now eroded by private investment and private ownership. The PRC today has an abundance of millionaires and not too few billionaires, a fact that would violently offend the militants of the Cultural Revolution.

At the same time, the ruling party in the PRC is the Communist Party. Its theorists and ideologues insist that they are proceeding down a distinctive, deliberate road to socialism. Ironically the PRC is now the darling of many in the right wing of the anti-capitalist movement, embraced by those who defend the market mechanism and a gradualist, evolutionary approach to socialism.

Among those advocating socialism, the PRC constitutes a kind of laboratory for socialist policy, much the way the Soviet Union was regarded after 1917. Partisans of socialism sift through the massive literature, reports, and commentaries on the PRC to find evidence to support ideological positions. For the most part, conclusions are, at best, tentative and speculative. Comprehensive conclusions remain illusive to even the most elevated intellectual egos.

Yet the PRC is entirely too formidable of a factor in global political and economic affairs to ignore. Therefore, I offer some modest observations.


Wherever the PRC road leads, it remains a lightening rod to bourgeois politicians and, unfortunately, most labor leaders. To hide their own failings, they easily and often point to some Chinese policy that stands in the way of satisfying the interests of working people. In its crudest form and in its essence, it is vulgar anti-Communism. Exploiting the deeply ingrained collective hysteria of the Cold-War, crass leaders and class-compromised union bureaucrats invoke the words “Chinese Communists” and mass distraction ensues. China-bashing has replaced Soviet-bashing (and the once popular Japan-bashing when Japanese corporate power was on the upswing) as an easy and frequent diversion from the rapacious behavior of multi-national corporations.

Rather than blame US multi-nationals for the destruction of decent paying jobs in the US, leaders scapegoat the PRC. From 1999 until 2009, US multinationals added 2.9 million workers abroad while cutting 864,400 in the US, according to the Commerce Department. In 2009, these monopoly capitalist enterprises employed 23.1 million workers in the US against 10.8 million in other countries. Most overseas employees are in Europe with the Chinese holding only 943,900 jobs from US multi-nationals. Canada, Mexico, and the UK, on the other hand, account for over 3 million of multinational overseas employment.

These same multinational corporations have reduced capital investment spending in the US at a decade long annual rate of .2% while boosting capital investment overseas by an annual average of 4%.

These job shifts are corporate decisions based upon profit expectations and, according to the Commerce Department, “primarily to sell to local customers… rather to sell in the US market.” Thus, politicians and union leaders are hiding behind simplistic and self-serving demagogy in blaming China for the demise of US jobs. And their aversion to class struggle against US corporate giants masks the role of those corporations in taking jobs to where they can recover profits most easily; bogus patriotism obscures corporate fealty to the bottom line.

When pressed to put some meat on the bare bones of China-bashing, bourgeois economists cite the currency policies of the PRC. They argue that the relationship between the yuan and other currencies is consciously maintained at a lower-than-market level to increase the competitiveness of the Chinese export industries. But that argument has evaporated over the last year. Third quarter reports of PRC current-account surplus – a widely acknowledged measure of trade imbalance – show a dramatic decline from a year earlier; against the third quarter of 2010, the PRC current-account balance fell by 43.5%. Through the first three quarters of this year, PRC current-accounts surplus as a percentage of GDP fell from 5.1% last year to 3% currently. Ironically, at the November, 2010 G20 meeting, the US pressed hard to establish 4% or less current-accounts surplus/GDP as the benchmark for determining whether currencies were reasonably valued. With the PRC easily passing this test, the US has no argument. Nonetheless, US policy makers and pundits, including liberals, like Roubini and Krugman, continue to pound away at PRC currency policies.

When these current-account numbers are coupled with the continued high growth of the PRC (9.1% in the third quarter), they suggest that the PRC has made a significant shift from export growth to investment and consumption growth.

For the US left, the myths supporting China-bashing should be emphatically rebuffed. While the PRC policies internationally are generally self-interested – the PRC has seldom demonstrated the kind of international solidarity associated with twentieth century socialism—they are nonetheless independent of US imperialism. That is, the PRC operates to promote its own security and economic health. Where it clashes with US imperialism, for example, in UN votes against NATO aggression, progressives should applaud its role. At the same time, it shares many features with imperialism in its competition for markets, resources, and economic advantage in the global economy. These features often place it on the wrong side in its relations with other countries.

White Cat, Black stripes; Black Cat, White Stripes?

Much heat has been generated over the question of whether the PRC is socialist or capitalist. But from a Marxist perspective – like that of Palme Dutt – the telling question is not where it is, but where it’s going: Is the PRC on a path towards socialism or capitalism? Where is the process leading?

No one can deny that for decades, the PRC has allowed -- indeed welcomed -- capitalism in the front door. Foreign direct investment, joint-stock and private-stock enterprises, privatization, securitization, and acceptance of the market mechanism have all transformed the PRC economy into a prominent player in the global economy. This change has brought forth stunning growth for the country and a general rise in the Chinese standard of living, certainly from the stagnation of the period of the Cultural Revolution. In only a few decades, the PRC leadership has mounted a veritable revolution as profound as the sharp turns organized in Mao’s era.

At the same time, capitalism has brought with it nearly all of its ills: inequalities that rival history’s worse, a shattered health care system, working conditions that too often approach that of Dickens’ England, corruption, cronyism, unemployment, and a broken sense of collective fate or communal solidarity.

The entry of capitalist features into the PRC economy has plagued it with the maladies that arise from the anarchy of markets: imbalances, speculative fervor and bubbles, inflation, labor unrest, grey and black markets, and labor market chaos. In the spring and summer of 2010, workers rose against low wages and working conditions in many areas. Again, this year, there were significant actions for better pay, working conditions and against layoffs. In the fall, the PRC’s sovereign wealth fund was forced to buy shares in major Chinese banks. Despite the fact that private investors own a quarter or less of the country’s biggest banks, a sell-off by foreign investors caused a near panic met by the sovereign wealth funds’ intervention. Today, inflation, a construction bubble, and over reliance on exports weigh on the economy.

Despite these ugly aspects of the PRC’s flirtation with capitalism, the PRC negotiated the most tempestuous waves of the global economic crisis without the catastrophic damage incurred by the other economic powerhouses. In addition, most honest analysts, including even The Wall Street Journal, credit the PRC with a large role in thwarting world economies from being swept over the brink in 2008-2009.

How was this done?

In my view, those structures intact from the PRC’s early commitment to socialist economics proved to be a bulwark against global economic turmoil, especially from the financial sector. Regardless of the future course of the Chinese economy, many elements of socialist economic structures remain and they and they alone, permitted the PRC to evade the harshest consequences of the 2008-2009 collapse and blunt the forces of the market.

1. Banks and finance: The PRC’s four largest banks dominate the financial system along with the Central Bank. Despite recent public offerings, the big four banks remain 75% or more under public ownership. The experiment in raising private funds through stock offerings has proven to be more damaging (a recent sell-off briefly rocked the stability of these public institutions) than advantageous, but, nevertheless, the banks remain steadfast under government management. And the Central Bank, unlike our corporate dominated Federal Reserve, functions as a publicly run and owned institution tuned in closely to government economic goals. The “shadow banking” that rocked Western private banks was virtually unknown in the PRC: no securitized US mortgages, no complex derivatives, opaque bank-to-bank deals, etc. The pillars of the financial system, because they were publicly owned and relatively transparent, stood solid against the crisis; they retained the central functions of a financial system without the corruption of private profiteering.

For sure, private banking in the PRC exists and jolts the smooth functioning and stability of the financial system, but to date the government has been able to adjust financial flows swiftly and efficiently.

2. Economic Policy: The PRC retains indicative planning, though flexible and partial. With the onset of the global crisis, the PRC embarked on a sharp turn towards domestic consumption and investment and away from a deteriorating international market. Quickly adopting a massive $622 billion stimulus program and loosening the valves on lending from the publicly owned banks, the PRC minimized the damage from a collapsing global capitalist economy. While the West, stumbled and delayed, politicizing and horse-trading intervention in the economy, the PRC acted promptly and decisively. As a result, the PRC maintained a growth rate well above Western norms through 2008-2009, while nearly all other countries endured negative growth.

Even with the corrosive and corruptive influences of capitalist social relations, the Communist Party of China remains a leading institution linked to advancing the general welfare of the people. That is, it continues to respect and seek the promotion of national interests. Compare its performance in the face of severe crisis to the appalling submission of bourgeois democratic institutions in the West to the welfare and interests of capitalist institutions; banks and corporations were rescued while living standards were decimated. In terms of serving the interests of the vast majority of the people, the PRC institutions proved far more democratic in content than the formal Western “democracies”.

3. Planned development: The PRC adopted the “National Medium- and
Long-Term Plan for the Development of Science and Technology” in 2006, a plan that proposed doubling the percentage of GDP devoted to research and development through 2020. At the end of this November, the PRC confirmed a plan to spend $1.7 trillion over the next 5 years on sectors including alternative energy, biotechnology, and advanced equipment manufacturing (Reuters, 11-21-11). Such national planning is virtually unheard of in the West since the massive investments in infrastructure, education, and research and development brought forth by the panic over the Soviet launch of Sputnik.

Chinese planning shows much more responsiveness and flexibility than policy initiatives in the West. With global demand shrinking from 2008 through 2009, the PRC shifted swiftly with internal investment and expanded consumption while Western powers debated and hesitated.

4. Public ownership: With state banks opening the floodgates, and a
Communist Party leadership quickly implementing a stimulus program, publicly-owned enterprises reacted immediately and decisively to the call to expand economic activity. While the public sector was curtailed in the early years of the shift to market relations, it remains dramatically larger than in Western countries or most Asian neighbors. In a generally hostile article in The Wall Street Journal (China’s ‘State Capitalism’ Sparks a Global Backlash, 11-16-10), the authors make the point vividly: In 2008, the assets of the PRC’s publicly owned firms totaled 133% of economic output; in the same year, France’s state-owned firms’ assets amounted to only 28% of economic product. While much speculation revolves around the role of the public sector in the PRC, these numbers give a perspective on how important publicly-owned enterprises are in the PRC. Thus, when essential stimulus programs or planning initiatives are undertaken, they translate into rapid, measurable results, unlike in the US where policies are pushed through the sieve of private contractors with the consequent siphoning off of overhead and profits, few jobs created, and long delays.

While many in the West are skeptical of the PRC’s ability to move away from export-driven manufacturing to domestic consumption, the following figures are revealing: Exports as a percentage of GDP have fallen from 35% in 2007 to 27% in 2010; third quarter 2011 import growth exceeded export growth; and retail sales grew by 17% in August and 17.7% in September of this year against the prior year.

Of course the PRC’s success in weathering the economic crisis is no guarantee that it will do so going forward. Certainly the PRC leadership is aware of difficulties ahead. The PRC Vice Premier, Wang Qishan, was recently quoted by the Xinhua news agency: “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic.”

The country’s participation in global markets could present problems that even its remaining socialist tools cannot overcome. Moreover, it is not clear if the PRC will strengthen these safeguards or jettison them, as its leading Communist Party shapes this awkward mix of socialism and capitalism.

Thus, forty-five years after Dutt’s pamphlet, we are still left with the burning question: Whither China?

Zoltan Zigedy


Charles Andrews said...

There's more to the currency situation. Basically, China has a huge trade surplus because the government lets Chinese companies sell the output of extremely cheap labor power to foreign corporations. The currency exchange rate is part of this arrangement, and that is why China piled up trillions of dollars in foreign cash and bonds. Recent narrowing of the trade surplus did not happen because Chinese workers got a better deal; rather, foreign demand even for cheap Chinese labor slumped because of the near-global depression.

We would all agree that the folks who expose the horrendous exploitation in China by Foxcomm in partnership with Apple, Inc., with the blessing of the Chinese government as well as the U.S. government, are hardly engaged in China-bashing.

U.S. workers, especially in manufacturing, are angry because U.S. corporations throw them out of work and move production to China (or the employer uses this threat to drive down U.S. wages). We can certainly "blame US multi-nationals for the destruction of decent paying jobs in the US." Part of the remedy is that the U.S. should put a tariff on imports made with sweatshop labor, the WTO be damned. Anyone who dismisses talk about the currency situation without putting forward points like these forfeits attention from U.S. workers.

zoltan zigedy said...

Thanks for your comments Charles, but I respectfully and emphatically disagree. “China-bashing” is all about hypocrisy and scapegoating by those who refuse to place the blame for the plight of US workers squarely on capitalism. Lost is a truth that working people must confront.

There is, in fact, no basis for singling out the PRC for blame. Other countries – capitalist countries like Germany, Japan, Taiwan, Russia, the Republic of Korea and the oil rich states – maintain much higher per capita current account balances than the PRC and yet they are not criticized for their trade policies.

The cheap labor in the PRC is the legacy of China’s past and not a “policy”. In fact, PRC living standards have risen more than the developed countries. Moreover, there are many other countries – historically impoverished or impoverished by capitalist relations (Eastern Europe)—that are available and intensely exploited sources for cheap labor. Yet they are not called out by the China-bashers.

We agree that the global crisis slowed the trade surplus between the US and the PRC, but it bounced up again in after the 1st quarter of 2009; its current decline is a matter of policy and not economic turmoil. The Chinese adjusted and maintained economic activity through internal growth, thus demolishing the excuse for China-bashing. Yet the bashing continues because it is a handy excuse for not fighting US corporations.

Those who criticize exploitation in the PRC (which I emphatically acknowledge), while ignoring it in other countries, especially their own, are guilty of hypocrisy and of China-bashing.

The numbers I cite demonstrate that Chinese employment is not the major, or even significant, source of direct US job loss overseas. Yet only the Chinese are blamed.

Neither the PRC government nor capitalist enterprises have much interest in helping the workers of other countries. The difference is that the PRC government does care enough about the interests of its workers to create jobs and a generally increasing standard of living; capitalist corporations only care about profits. China-bashing labor leaders and their go-along Democratic Party colleagues refuse to confront this naked truth.

I have no quarrel with tariffs, though since the US government has successfully encouraged unfettered trade, the US would face retaliatory tariffs and likely worsen any competitive advantages. But then we could again blame China.

It’s anti-Communism.

George Hallam said...

"There is, in fact, no basis for singling out the PRC for blame. Other countries – capitalist countries like Germany, Japan, Taiwan, Russia, the Republic of Korea and the oil rich states – maintain much higher per capita current account balances than the PRC and yet they are not criticized for their trade policies."

I am not a "China basher" but the economics here are all awry.

The problem is neither low wages nor the "per capita current account balance". It is the absolute size of this balance and its persistence over many years.

This not due to low wage rates, but to the exchange rate. This is a matter of Chinese Government policy.

zoltan zigedy said...

George, I'm sorry but size does not matter with the accumulated trade surplus any more than in other matters. It is, of course, a fact that the PRC has retained enormous amounts of US dollars from its exports. But this is not a problem, especially since it repatriates the dollars by purchasing US securities with the surplus. All economists acknowledge this role in stimulating the US economy.

The exchange rate is a sovereign matter; if China -- or any country -- determines its own exchange rate, that is its business and not a matter for others. After all, they can refuse to do business if they don't like it. But US corporations do business. Those who fault the PRC should "bash" US corporations. Of course they don't.

I would be interested to see where critics find the link between PRC dollar reserves and some insidious effect on the US economy. Show me...