China’s economy (Part I and II)

By Radhika Desai, Michael Hudson and Mick Dunford

Part I

What is China’s future? Economic decline, or the next industrial revolution?

Published 2024-03-28

Political economists Radhika Desai and Michael Hudson are joined by Beijing-based scholar Mick Dunford to discuss what is actually happening in China’s economy, explaining its technological development and transition toward a new industrial revolution.

Transcript

RADHIKA DESAI: Hello and welcome to the 24th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.

MICHAEL HUDSON: I’m Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weiser.

And with us today we have, once again, Professor Mick Dunford, professor emeritus of geography at Sussex University and now working at the Chinese Academy of Sciences, keeping a close watch, among other things, on China’s economy. So welcome, Mick.

MICK DUNFORD:  Thank you very much.

RADHIKA DESAI: So, China’s economy is what we’re going to talk about today. Where is it at after decades of breakneck growth, after executing the greatest industrial revolution ever? Where is it headed?

Trying to understand this is not easy. The disinformation that is fake news and even what I often call fake scholarship that distorts the view that any honest person may be trying to take on China’s economy is simply overwhelming. It’s absolutely wall-to-wall propaganda, no matter which Western publication or website you open.

If we are to believe the Western press and the leading scholarly lights of the West, who are the major generators of the Western discourse on China, we are at peak China. That is to say, they claim that China has reached a point, reached the highest point, that is, that it ever can. And from here on, it’s only going to be downhill, more or less rapidly.

They say that China has, in recent years, inflated a huge property bubble to compensate for the West’s inability to keep up imports. And this bubble is about to burst. And when it does, it will subject China to a 1980s and 1990s Japan-style long-term deflation or secular stagnation. They have even invented a word to talk about this: “Japanification”. We are told that the Japanification of China’s economy is impending.

They say that the U.S.’s trade and technology wars are hitting China where it hurts the most, at its export and its reliance on inward foreign investment. They are saying that China has grown only by stealing technology. And now that the U.S. is making it harder for it to do so, its technological development can only stall. They are saying that China followed disastrous COVID-19 policies, leading to mass death, draconian lockdowns, and economic disaster.

They are saying that China over-invests, and its growth will not pick up unless China now permits higher consumption levels. They are saying that China has a serious unemployment crisis, that the CPC, the Communist Party of China, is losing legitimacy, because it is failing to deliver ever-higher living standards. And they are saying that Xi Jinping’s authoritarian leadership is ensuring that the private sector will stall, and with it, so will China’s growth.

All this, they say, before even beginning to talk about China’s foreign policy. And there, of course, lie another long litany of alleged disasters and misdemeanors that China is responsible for, beginning with debt-trap diplomacy and China’s allegedly voracious appetite for the world’s resources.

The only reason why Western experts ever stress the strength of China’s economy is when they want to argue that the West must redouble its efforts to contain China and to stall its rise.

So today, we’re going to take a closer look at China’s economy, and in doing so, we’re going to bust a lot of these myths. We’re going to show you that, sadly, for the purveyors of the fake news and fake scholarship about China, no amount of their huffing and puffing has been able to blow down China’s house, because, like the good, the smart little pig, China is actually building its house with bricks.

So, we have a number of topics to discuss in this show. Here they are:

1.    Characterising China’s Economy: Capitalist? Socialist?

2.    Growth Story

3.    Covid Response

4.    The Alleged Debt and Property Bubble? And Japanification?

5.    Restricted Consumption? Stagnant living standards?

6.    Exports in the China Story

7.    China’s new growth strategy

8.    China’s foreign policy

So, these are the topics that we hope to discuss. We want to begin by talking about how to characterize China’s economy. Is it capitalist? Is it socialist? Then we will do the most important and primary basic thing, we will look at the growth story with some statistics. We will then look at China’s Covid response. We will look at the alleged debt and property bubble and whether China is being Japanified.

Then we will look at the issue of whether China is overinvesting and neglecting consumption and living standards, etc. How reliant is China on exports? What is China’s growth strategy? And what is China’s foreign policy? And are those myths about it true? So, this is what we hope to discuss.

So, Mick, why don’t you start us off with your thoughts on exactly how to characterize China’s economy?

MICK DUNFORD: Ok, the way I would characterize China is as a planned rational state. I mean, right the way through, it has maintained a system of national five-year planning, and it also produces longer-term plans. But it’s a planned rational state that uses market instruments.

China has a very large state sector. And of course, some people have claimed that this state sector is, in a sense, an impediment to growth. And we’ve seen a resurrection of this idea, guo jin min tui (国进民退), which is used to refer to the idea that the state sector is advancing and the private sector is retreating.

It’s a very, very strange concept, in fact, because the third word is min (民), and min refers to people. So, what they are actually, in a sense, saying – these ideas were invented by neoliberal economists in 2002 – the private sector is equated with the people, which I find absolutely astonishing. But, I mean, the country does have a very significant public sector.

What I find striking is that one can actually turn it around and say, what is it that these Western economists seem to think China should do? And they seem to think that China should privatize all assets into the hands of domestic and foreign capitalists. It should remove capital controls. It should open the door to foreign finance capital. It should transfer governance to liberal capitalist political parties that are actually controlled by capital.

I think one of the most fundamental features of the China system is actually that it’s the state that controls capital, rather than capital that controls the state. And it’s, in fact, this aspect of the Chinese model, and in particular, the rule of the Communist Party of China that has basically transformed China from what was, effectively one of the poorest countries in the world into one of its largest industrial powers.

So, in a way, it’s a planned rational state in which the CPC has played an absolutely fundamental role. And without it, I mean, China would never have established the national sovereignty that permitted it to choose a path that suited its conditions and to radically transform the lives and livelihoods of its people.

RADHIKA DESAI: Michael, do you want to [speak]?

MICHAEL HUDSON: The question is, what is the state? There are two aspects of the state with China. One is public infrastructure. And the purpose of China’s public infrastructure is to lower the cost of doing business because infrastructure is a monopoly.

That’s what really upsets the American investors. They wanted to buy the phone system, the transportation system, so that they could benefit from charging monopoly rents, just like under Ronald Reagan and Margaret Thatcher.

The most important sector that China’s treated in the public is money creation and banks. Americans hope that American banks would come over and they would be making all the loans in China and benefiting from China’s growth and turning it into interest. And instead, the government’s doing that. And the government is deciding what to lend to.

And there’s a third aspect of what people think of when they say state. That’s a centralized economy, centralized planning, Soviet style.

China is one of the least centralized economies in the world because the central government has left the localities to go their own way. That’s part of the Hundred Flowers Bloom. Let’s see how each locality is going to maneuver on a pragmatic, ad hoc basis.

Well, the pragmatic ad hoc basis meant how are localities, villages, and small towns going to finance their budgets? Well, they financed it by real estate sales, and that’s going to be what we’re discussing later.

But once you realize that the state sector is so different from what a state sector is in America, centralized planning and the control of Wall Street for financial purposes, finance capitalism, hyper-centralized planning, you realize that China is the antithesis of what the usual view is.

RADHIKA DESAI: Absolutely. And I’d just like to add a few points, which dovetail very nicely with what both of you have said.

The fact of the matter is that this was also true of the Soviet Union and the Eastern European countries when they were still ruled by communist parties. We generally refer to them as socialist or communist, but in reality, they themselves never claimed to be socialist or communist. They only said they were building socialism, especially in a country that was as poor as China was in 1949.

The leadership of the Communist Party of China has always understood that there has to be a long period of transition in which there will be a complex set of compromises that will have to be made in order to steer the economy in the direction of socialism, in order to build socialism.

So, from its beginnings, the revolutionary state in China was a multi-class state and a multi-party state. People don’t realize very often that while the Communist Party of China is the overwhelmingly most powerful party in China, there are other parties that exist as well, which reflect the originally multi-class character of China.

Now, it’s true that since 1978, the government has loosened much of its control over the economy. But the important thing here is that the Communist Party retains control of the Chinese state.

The way I like to put it is, yes, there are lots of capitalists in China. Yes, those capitalists are very powerful. They are at the head of some of the biggest corporations in the world, and they are quite influential within the Communist Party. But what makes China meaningfully socialist or meaningfully treading the path to socialism, let’s put it that way, is the fact that ultimately the reins of power are held in the hands of the Communist Party of China leadership, which owes its legitimacy to the people of China.

So, the reigns of power, the reigns of state power are not held by the capitalists; they are held by the Communist Party leadership.

So, in that sense, I would say that China is meaningfully socialist. Although, as Mick pointed out, there is a fairly large private sector in China, but so too is the state sector very large. And the extent of state ownership means that even though the private sector is very large, the state retains control over the overall pace and pattern of growth and development in the country.

And I just add one final thing here, which is going to become quite important as we discuss the various other points, and that is that the financial sector in China remains very heavily controlled by the state.

China has capital controls, China practices a fair degree of financial repression, and China’s financial system is geared to providing money for long-term investments that improve the productive capacities of the economy and the material welfare of the people. And this is completely different from the kind of financial sector we have today.

So, Mick or Michael, did you want to add anything?

MICK DUNFORD: Just to reiterate, I mean, the point is, the government sets strategic targets that relate to raising the quality of the life of all the Chinese people. And it has strategic autonomy, which gives China the opportunity or the possibility of actually choosing its own development path.

And I think that’s something that very strikingly marks China out from other parts of the Global South that have had much greater difficulty, in a sense, in accelerating their growth, partly because of debt and their subordination to the Washington financial institutions.

So I think that is critically important, the role of sovereignty and autonomy in enabling China to make choices that suited its conditions, and at the same time making choices that are driven by a long-term strategic goal to transform the quality of the lives of all Chinese people.

MICHAEL HUDSON: I want to put in one word about sovereignty. You put your finger on it. That’s really what makes it different.

What makes other countries lose their sovereignty is when they let go, how are they going to finance their investment? If they let foreign banks come in to finance their investment, if they let American and European banks come in, what do they do? They fund a real estate bubble, a different kind of a real estate bubble. They fund takeover loans. They fund privatization.

Banks don’t make loans for new investment. China makes great money to finance new tangible investment. Banks make money so you can buy a public utility or a railroad and then just load it down with debt, and you can borrow and borrow and use the money that you borrow to pay a special dividend if you’re a private capital company. Pretty soon, the country that follows this dependency on foreign credit ends up losing its sovereignty.

The way in which China has protected its sovereignty is to keep money in the public domain and to create money for actual tangible capital investment, not to take your property into a property-owning rentier class, largely foreign-owned.

RADHIKA DESAI: Thank you. Those are very important points. Thank you.

I’d just like to add one final point on the matter of how to characterize the Chinese economy and the Chinese state. At the end of the day, it’s not just important to say that the state controls the economy, but whose state is it?

The way to look at it as well is that in the United States, essentially we have a state that is controlled by the big corporations, which in our time have become exceedingly financialized corporations, so that they are directing the United States economy essentially towards ever more debt and ever less production, whereas that is not the case in China.

And the question of whose state it is makes use of the word autonomy. The autonomy refers to the fact that it is not subservient to any one section of society, but seeks to achieve the welfare of society as a whole and increase its productive capacity.

MICK DUNFORD: If I may just add, I think also it’s important that you pay attention to the policy-making process in China. It’s an example of what one might call substantive democracy. It delivers substantive results for the whole of the Chinese population.

In that sense, it delivers improvements in the quality of the lives of all the people, and therefore, in a sense, it’s a democratic system. But it’s also a country that actually has procedures of policy-making, experimentation, design, and choice and so on that are extremely important and that have fundamental aspects of democracy about them.

When Western countries characterize China as authoritarian, they’re actually fundamentally misrepresenting the character of the Chinese system and the way in which it works, because they, in a sense, merely equate democracy with a system, whereas China, of course, does have multiple political parties, but a system with competitive elections between different political parties. There are other models of democracy, and China is another model of democracy.

RADHIKA DESAI: Mick, you’re absolutely right to talk about the substantive democracy. Indeed, in China, they have recently developed a new term for it. They call it a “whole process democracy”, and it really involves multiple levels of consultation with the people, going down to the most basic village and township levels, and then all the way up the chain.

And I think this process does work, because the other remarkable thing about the CPC leadership is its ability to change direction pragmatically. If something does not work, then it assesses what it has attempted, why it has failed, and then it revises course. So, I think we will see several instances of this as we talk as well.

Michael, you want to add something?

MICHAEL HUDSON: One thing about democracy. The definition of a democracy traditionally is to prevent an oligarchy from developing. There’s only one way to prevent an oligarchy from developing as people get richer and richer, and that’s to have a strong state.

The role of a strong state is to prevent an oligarchy from developing. That’s why the oligarchy in America and Europe are libertarian, meaning get rid of government, because a government is strong enough to prevent us from gouging the economy, to prevent us from taking it over.

So, you need a strong central state in order to have a democracy. Americans call that socialism, and they say that’s the antithesis of democracy, which means a state that is loyal to the United States and follows U.S. policy and lets the U.S. banks financialize the economy. So, just to clarify the definitions here.

RADHIKA DESAI: Very, very true, Michael. But let’s not go, I mean, maybe we should do a separate show on political theory of the state, because that’s equally important.

But for now, let’s look at our next topic. We hope, of course, that everybody understands how we characterize China’s state. But now, let’s look at China’s GDP growth.

So, here you have a chart, and we have several charts on this matter, but we’ll take them one by one and comment on them:

So, here we have a chart showing the annual rate of GDP growth from 1980 to 2028. Of course, post-2023 are their projections, which are shown by the dotted lines. And I’ve only taken a few selected countries from the Our World in Data website, and anybody can go there and look at this data, by the way.

So, you can see China and then a handful of the most important Western countries. And you can see that going back to 1980, essentially China’s growth rate, which is here, the top red line here, has absolutely been massively higher on practically any year than the other countries.

In fact, you see I left Russia in here. I should probably have taken it out. It’s a bit of a distraction, because here you see Russia’s growth rate massively bouncing up from the late 90s financial crisis. But let’s leave that aside.

All the other major countries, which you see here, they are all showing considerably lower growth. So, the United States here is this orangish line. And essentially, they’re all showing much lower growth.

And more recently as well, this is the Covid-19 pandemic. And you can see that China, again, like all the other countries, it experienced a fairly sharp decline in the growth rate, but it still remained positive, unlike all the other countries.

And it remains substantially above that of the rest of the economies that constantly are telling China how to improve its economic policy. So, that’s what I want to say about this chart.

But Mick, go ahead.

MICK DUNFORD: Can you show that table that I sent?

RADHIKA DESAI: Yeah, sure. Yes, here we go:

MICK DUNFORD: These are more recent growth rates for China, for the world, and for the G7. And I mean, first of all, they show absolutely clearly that China’s growth rate is still a long way in excess of the average growth rates of all G7 countries, many of which have actually performed abysmally. I mean, Germany is now in recession, it declined 0.3% per year this year. I mean, Italy has had extremely low rates of growth, France, Germany, the United Kingdom, Japan, all had extremely low rates of growth.

China last year achieved a growth rate of 5.2%. It itself expects to grow at 5% next year. The IMF forecast 4.6%. Even that 4.6% target is quite close to the average growth rate that China needs to achieve to meet its 2035 target. It has a 2035 target of doubling its GDP, its 2020 GDP by 2035. I think that that goal is perfectly realizable. And in that sense, I strongly disagree with people who argue that China has in a sense peaked.

But I do find it, really quite astonishing, that Western countries, whose economies have performed extremely poorly, feel in a position to lecture China about how it should address what is said to be an unsatisfactory rate of growth. That’s the first point I want to make.

I just want to say something else, if I may. When we talk about, I mean, China’s growth has slowed. And, there’s no doubt that in terms of people’s everyday lives, there are many difficulties. And I just want to quote something.

At New Year, Xi Jinping gave a speech. I wanted to cite his actual words. He recognised that in these years, China faces what he called the tests of the winds and rains. And then he said, when I see people rising to the occasion, reaching out to each other in adversity, meeting challenges head on and overcoming difficulties, I am deeply moved.

So, the leadership and all Chinese people are well aware that there are many, many difficulties and challenges confronted, because China is actually undergoing a major structural transformation about which we shall speak later. But China is also in the short term undertaking a lot of important actions that are actually designed to cope with some of the real difficulties that people confront.

So, if you listen to Li Qiang’s government work report, he addressed the problem of short-term employment generation. And there are proposals for 12 million new urban jobs to increase employment, especially for college graduates and other young people, because for young people, the unemployment rate, including college students, is in the region of 21 percent. Urban unemployment is 5 percent. So, there are issues to do with the generation of employment.

Government expenditure this year will target a whole series of strategic issues, but also livelihoods. So, affordable housing, youth unemployment, job security, insurance, pensions, preschool education, the living conditions in older communities. So, I’m just saying that, in the current context, difficult economic situation and a particularly turbulent global situation. I mean, China, as every other country in the world, faces challenges, and it is in many ways directly addressing them in very important ways.

RADHIKA DESAI: Great. Thanks, Mick. Michael, do you want to add anything?

MICHAEL HUDSON: No, I think that’s it. The question is, what is the GDP that is growing? There are a number of ways of looking at GDP. And when I went to school 60 years ago, economists usually thought of GDP as something industrial. They’d look at energy production. They’d look at railway cargo transportation.

If you look at the industrial component of what most economists used to look at, electricity is the power for industry, electricity is productivity growth for labor. If you look at these, what is the component of GDP, you realize that these differences in Mick’s charts are even wider than what he showed, because the American GDP, very largely interest, overdraft fees of credit card companies, as we’ve said, is providing a financial service. 7% of American GDP is the increase in homeowners’ view of what their rental value of their property is. That’s 7%.

Now, I doubt that China includes a measure like this in its GDP. But if it did, with all of its rise in real estate prices, its GDP would be even higher in a reality-based basis.

So real GDP, as we think of it, and the public thinks of it, is something useful and productive. Actually, China’s doing a much more efficient job in minimizing the kind of financial and rentier overhead that you have in the United States.

RADHIKA DESAI: Exactly, Michael. What I was going to point out as well is that these figures of U.S. GDP growth and the absolute level of U.S. GDP are heavily financialized.

The financial sector, which actually is not a force for good in general in the U.S. economy, it is out of which the indebtedness comes, out of which the productive weakening comes. The growth of the financial sector is counted as GDP in the United States and massively inflates U.S. GDP, which would not be as high as this.

And this is particularly important given that President Biden, for example, is congratulating himself now for having the strongest economy in the world or the Western world or whatever it is. Well, that’s what the U.S.’s boast is based on.

And China does not do that, nor does it have the kind of financial sector which creates, which destroys the productive economy. Rather, as we were saying, it has the kind of financial sector that supports it.

So, just another general point I want to make. We were talking about this chart:

This shows from 1980 to 2028, and the projections remain, by the way, even from conservative sources, that China’s growth is going to remain higher than the rest of the world, particularly the Western countries, for a long time to come.

And I also decided to show you this chart:

This is the chart of growth, which is just a more focused version of the previous one, which shows growth rates from 2008 to 2028.

So 2008 is when we had what Michael and I call the North Atlantic Financial Crisis. And since then, what we’ve seen is, yes, of course, all countries have seen a sort of a reduction in their growth rate, and certainly China has. But even since then, you can see that China’s growth remains high and stable. So, that’s another thing that we wanted to show.

And this is a chart showing the rise of per capita GDP:

That is to say, you can have a higher GDP, but if your population is expanding, then to what extent is per capita GDP rising? So, you can see here that, again, even in terms of per capita GDP, and this only again goes to 2021, but in terms of per capita GDP, China has remained head and shoulders above all the major Western countries.

And this bounce here that you see in the case of the US and the UK here, it is only a dead cat bounce from the absolute depths to which their economies had sunk during Covid, and so they came to some sort of normalcy.

Mick, you may want to say something about this chart, because you sent it to me. So, please go ahead:

MICK DUNFORD: It’s correct, of course, that China’s growth slowed. Now, in 2013, China entered what is called the New Era. At that time, China decided that its growth rate should slow. It chose slower growth. It spoke of 6 or 7 percent per year, and it more or less achieved that, until the Covid pandemic. So, China chose slower growth for very particular reasons, and I think in this discussion, we shall come to some of these reasons later on.

But in a sense, what they want is what they call high-quality growth. And what China is seeking to do is undertake a profound structural transformation of its economy, establishing new growth drivers by directing finance towards high-productivity sectors and directing finance towards the use of digital and green technologies in order to transform its traditional industries. So, in a sense, it’s undergoing a profound process of structural transformation.

And I mean, if you, for example, look at Li Qiang’s speech, the major tasks include invigorating China through science and education, so to strengthen the education, science and technology system, to improve the capabilities of the workforce, or promote innovation, industrial investment and skills, and another, striving to modernize the industrial system and accelerate the development of new productive forces, bearing in mind that we’re on the verge of a new industrial revolution. But these are very important issues, fundamentally important issues.

RADHIKA DESAI: And I would say just, and I know we’ll talk about it at greater length later on, but it is really important to bear in mind that really, when the world stands at the cusp of being able to exploit new technologies like quantum computing or nanotechnology or artificial intelligence or what have you, a relatively centralized decision-making process about how to allocate resources, for what purposes, for what social benefits, etc., is likely to prove far superior, that is to say, China’s method is likely to prove far superior than the Western tactic of leaving private corporate capital in charge of the process.

And just to give you a couple of instances of this, the fact that private corporate capital is in charge of the development of digital technologies is already creating all sorts of social harms in our Western societies, whether it is harms to children’s mental health or even adults’ mental health, to political division that the algorithms sow and so on.

And also, it is leading to a situation where even these mega-corporations, these giant corporations, actually do not have the resources to invest, the scale of resources that will be needed to invest. So, for example, you hear in the Financial Times that Sam Altman is looking for people to invest in his artificial intelligence ventures, which will require trillions of dollars, and he cannot find private investors for it. So, this is really quite interesting.

Okay, so if we’re done with the growth rate story, oh, and I just want to say one other thing about this, which is, this is a GDP per capita in purchasing power parity, and China, in the space of a few decades, essentially, has experienced the biggest spurt in per capita well-being, etc., which includes important achievements like eliminating extreme poverty.

The Communist Party has brought China to essentially per capita GDP in purchasing power terms of next to nothing in 1980 to about $20,000 per annum in 2020. This is really quite an important achievement. And to do this for a country of 5 to 10 million people would be laudable, but to do this for a country of 1.3 billion people is a massive, historic achievement, and I think that’s something to remember.

MICK DUNFORD: I just, if you just go back for one minute, I mean, I absolutely agree with what you’ve just said, Radhika.

I’ll just make a comment about this chart. It’s because we were probably going to speak about Japanification:

It basically shows that the GDP per capita of Japan, and indeed of Germany, closed in on the United States, and actually Germany overtook it in the 1980s. But after that point in time, I mean, after the revaluation of their two respective currencies, and after the, the bubble, the stock market and property market bubble in Japan, you saw stagnation set in. And there’s a question as to whether that will happen with China.

But I mean, I think that one thing that’s striking in this diagram is that China is still at a much lower level of GDP per capita than Japan, or indeed Germany was at that time. And those economies, because, they were at the technological frontier to some extent, had to innovate, move into new technologies.

China, because there is still a technological gap, has enormous opportunities to accelerate its growth in a way in which, well, Japan failed because it chose not to take up opportunities, and it gave up semiconductors manufacture. But China has enormous opportunities, and that’s one reason why we must anticipate China’s growth as continuing.

RADHIKA DESAI: Absolutely. Thank you, Mick. Okay, so if we’re done with the growth story, let’s go to our next topic, which is what happened in China under Covid-19. Now, of course, there is just so much dispute about and controversy around Covid and Covid strategies, etc. So we don’t want to get into all of them, but I just want to emphasize two things.

We’ve already looked at the growth figures, we looked at the growth figures around Covid:

So you can see here that in 2020, all economies had a big dip thanks to Covid in their economies, but China is alone among the major economies to have remained in positive growth territory, and to have, of course, remained much higher than the rest of the other major world economies. So essentially, China, whatever China did, it did not sacrifice growth.

Now, this is very ironical, because in the Western countries, we were told that we need to, in order to continue growing, we need to, so in order to preserve livelihoods, which was the euphemism for preserving the profits of big corporations, in order to preserve livelihoods, we may have to sacrifice some lives. And the Western economies went through an absolutely excruciating process of lockdown here, and opening there, and lockdown again, and opening again, and so on.

But all of this had devastating impacts on Western economies, whereas China prioritized the preservation of life above all. And it imposed a lockdown knowing that, okay, even if we are going to develop vaccines, and remember, China developed its own vaccines, and effectively inoculated over 70 percent of the population by the time they began reopening.

China prioritized the saving of lives, and it was accused of essentially creating world shortages by shutting down its economy, etc. But in reality, China’s strategy, which focused before the availability of vaccines, on essentially physical distancing, isolation, etc., as was necessary, but China managed to do it in a way as to keep up a relatively robust growth rate, and very importantly, lose very few lives.

This is a chart, again from Our World In Data, of cumulative Covid-19 deaths per million of population:

So here we have all these countries, the United States and United Kingdom are these top two lines, Germany, Canada, Japan, even though we are told that East Asian economies did well because they had experience with SARS, etc., even then, compared to China, which is down here with a cumulative Covid death rate per million of about 149 or something people dying per million, and these numbers are over 3,000, almost 4,000 per million at this point in the United States and the UK, and then you have these other economies.

So China actually managed to avoid the worst of Covid, both in terms of lives and in terms of livelihood, and it did so because it did not compromise the saving of lives.

Does anyone else want to add anything? Mick? You were there.

MICK DUNFORD: Well, I mean, obviously, there were difficulties for some people in some places at some times. I was here right through it. All I can say is the impact personally on me was extremely limited.

It was a very effective system for protecting life. And if you lived in some places, then in fact the impact on your life, apart from having frequent nucleic acid tests and so on and ensuring that your health code was up to date, the impact on one’s life was relatively limited.

But in some places, obviously, in Wuhan at the outset, in Shanghai later on, the impact was very considerable.

But I think it’s an indication of the importance of a kind of collectivism, and the priority given to the protection of human life. And as you said, it is quite striking that actually through it, China’s economy actually kept ticking over.

And of course, China produces so many important intermediate goods that obviously it was also very important in providing things that were needed in many, many other parts of the world.

It also shared its drugs, its vaccines, which is really quite different, in a sense, from the conduct of the United States. And to some extent, the Western pharmaceutical companies.

RADHIKA DESAI: Absolutely. Michael, go ahead.

MICHAEL HUDSON: In the United States, that would be considered a failure of policy. The United States used Covid as an opportunity to kill.

For instance, the governor of New York, Cuomo, took the Covid patients and he moved them into all of the assisted living and old people’s homes. And that had a great increase in productivity. It resulted in enormous death rates for the elderly.

That helped save New York’s pension plan system. It helped save other pension plans. It helped save Social Security because the dead people were no longer what America called “the dead weight”.

The American policy was to indeed infect as many people over the age of 65 as you could. And that helped balance state, local budgets, pension plan budgets.

The increase in the death rate is now the official policy of the Center for Disease Control in the United States. They say do not wear masks. They’ve blocked any kind of mask wearing. They’ve done everything they could to prevent the use of HIPAA filters or airborne disease. The Disease Control Center says that Covid is not an airborne disease. Therefore, do not protect yourself.

Well, the result is many children have been getting Covid and that weakens their resistance system. And they’re getting measles and all sorts of other things. And all of that is greatly increasing GDP in America. The health care costs of America’s destructive policy.

I think Marx made a joke about this in Capital. He said when more people get sick, the doctors and the economic output goes up. Are you really going to consider sickness and destruction and fires rebuilding and cleanup costs? Are you going to count all of this there?

RADHIKA DESAI: But the irony is Michael, even with all of that, America’s GDP plunged so deeply down.

Well, I think we should move on to the next topic, but I will just say one thing. It is generally said that China is in a panic, the Chinese government reversed its draconian Covid policies because there were popular protests, and blah blah and so on. I would not agree with that.

Certainly, there were some popular protests. It also seems as though at least some of them were being pushed by the National Endowment for Democracy with the typical color revolution style. They have one symbol that symbolizes it. So, they decided to put up blank pieces of paper, etc. So, there’s no doubt that there was some of this going on. And as Mick said, undoubtedly, there were local difficulties in many places.

But what becomes very clear is that China decided to lift Covid restrictions towards the end of 2022 only after it has satisfied itself that the risk. And I should also add one thing. It was under pressure to lift these restrictions a great deal because the fact was that the rest of the world was not following China’s footsteps apart from a handful of other countries. And they were socialist countries. They were not following China’s footsteps.

So, it’s very hard to be the only country that’s doing it. But nevertheless, despite all those pressures, China had a very deliberate policy. It lifted Covid restrictions after assuring itself that enough of the population had been vaccinated, as to achieve something close to herd immunity.

And these figures of deaths per million demonstrate that China’s bet proved right, and China continues to monitor the situation. Covid hasn’t gone away.

And so, in all of these ways, I think that it’s important for us to understand that China’s policy has actually been above all about protecting people’s lives.

MICK DUNFORD: Just from my recollection, the demonstrations of which you spoke, where the slogans were written in English, I wonder who they were talking to, were on the 1st of December. China had, on the 11th of November, already announced the steps of, in a sense, removing restrictions. And then they were finalized in early December. So, the change was already underway.

RADHIKA DESAI: Exactly. Great. So, I think we are at almost, I think, 50 minutes or so. So, let’s do the next topic, which is the property bubble. And then we will stop this episode and we will do a part two of this episode, and do the other four topics that remain in part two.

So, Mick, do you want to start us off about the property bubble and the alleged Japanification, impending Japanification of China’s economy?

MICK DUNFORD: Okay. Well, if you want, you can just show the chart:

Basically, you can see that throughout this period, Chinese house prices have risen quite substantially. You know, in a sense, the story started, with housing reform, after 1988, when China moved from a welfare to a commodity system. And then, in 1998, it actually privatized Danwei housing, and it adopted the view that housing should be provided, as a commodity by developers.

And in 2003, that course of action was confirmed. And from that point in time, one saw very, very substantial growth in the number of developers, many of which, the overwhelming majority of which were private developers. So, in a sense, they moved towards a fundamentally market system.

And they very quickly had to make certain adjustments because they found that while the quality of housing and the amount of housing space per person was going up, these developers were orienting their houses towards more affluent groups. So, there was an under-provision of housing for middle-income groups and for low-income groups.

And so, there were progressively, you saw over the years, increasing attention paid to the provision of low-cost housing and of low-cost rented housing. And in fact, in the current five-year plan, 25% of all housing is meant to be basically low-cost housing.

So, the important point is that this problem emerged in a system that was liberalized, actually, I mean, in line with recommendations that were made in 1993 by the World Bank.

So, in other words, it’s an example of a liberalized, predominantly market-led, private-led system, in which these difficulties and these problems have emerged.

So, that’s the first thing I want to say. And I mean, obviously, to address housing needs, China has had, over the course of time, to considerably move back in the direction of providing low-cost housing in order to meet the housing needs of the Chinese people.

But basically, in August 2020, the government got very, very deeply concerned about, on the one hand, increasing house prices and, on the other hand, the explosion of borrowing and the fact that the liabilities of many of these developers substantially exceeded their assets.

And of course, the other line on that chart is a line indicating house prices in the United States. And of course, it was the crash of prices in the subprime market that, in a sense, precipitated the financial crisis. So, China, in the first place, is absolutely determined that it should not confront that kind of problem that was generated by the liberalized housing system in the United States.

So, I mean, that’s the first thing I basically want to say.

If you want, I can say something about the case of Evergrande. But basically, what China did in 2020 was it introduced what it called Three Red Lines, which were basically designed to reduce financial risks.

But it had a number of consequences because it, to some extent, deflated the housing market. Housing prices started to fall. Some of these developers found themselves in a situation where their liabilities substantially exceeded their assets. There was a decline in housing investment.

But to some extent, I think this is a part of a deliberate goal of basically diverting capital towards, as I said earlier, high productivity activities and away from activities, especially the speculative side of the housing market. So, I’ll just say that for the moment, but I can come back and say something about Evergrande, if you wish, in a few minutes.

RADHIKA DESAI: Okay, great. Michael, do you want to add anything?

MICHAEL HUDSON: Well, what I’d like to know as the background for this is what is the, how much of this housing is owner-occupied and how much is rental housing? That’s one question. The other question is how much is the ratio of housing costs to personal income? In America, it’s over 40% of personal income for housing. What’s the ratio in China?

I’d want to know the debt-equity ratio. How much debt, on the average, for different income groups? Debt relative to the value of housing. In America, for the real estate sector as a whole, debt is, the banker owns more of the house than the nominal house owner, whose equity ratio for the whole economy is under 50%.

These are the depth dimensions that I’d want to ask for these charts, if you know anything about them.

RADHIKA DESAI: Okay, thanks for that. And so, I just want to add one thing, which is that, this graph actually really says it all, and in some ways implicitly answers Michael’s questions:

Because the blue line, which shows the United States property prices, you can see that they reached a certain peak at 150% of the value of its 2010 values in 2008. Then it went down to below the level of 2010.

But U.S. monetary policy, Federal Reserve policy, its continuing deregulated financial sector, the easy money policy that was applied in a big way with zero interest rate policies, with quantitative easing, etc., etc., has simply led to a new property boom, where the prices of property prices have reached a peak, which is even higher than that of 2007-8, which was such a disaster. And this was all made possible precisely by the, by increasing housing debt, etc.

Whereas in China, a big driver of the housing boom has actually been that people are investing their savings in it. So, by logically, it means that the extent of a debt in the housing market will be comparatively lower. The entities that are indebted are actually the developers.

And that’s a very different kind of problem than, than the, than the owners being indebted. So that’s the main thing I want to say.

And Mick, you wanted to come back about, about Evergrande, so please do. And then remember also that we want to talk about this chart in particular, and deal with the question of Japanification:

So, please go ahead, Mick. Let’s talk about that.

MICK DUNFORD: Okay, well, I mean, as Radhika just said, the problem is, the indebtedness of developers, and the existence of debts that considerably exceed the value of their assets.

And the way in which this situation has come about, and I mean, as I said, the Chinese government, in a sense, wants to address the financial risks associated with that situation, and did so by introducing these so-called Three Red Lines.

It also is interested in reducing house prices, and it’s also interested in redirecting finance towards productivity-increasing activities.

So, Evergrande is an enormous real estate giant. It has debt of 300 billion dollars. It has 20 billion of overseas debt, and its assets, according to its accounts at the end of the last quarter of last year, are 242 billion. And 90 percent of those assets are in mainland China. So, its liability asset ratio was 84.7 percent, and the Three Red Lines set a limit of 70, 70 percent. So, it’s substantially in excess of the red line.

In 2021, it defaulted. And then, in January this year, it was told to liquidate after international creditors and the company failed to agree on a restructuring plan. In September, by the way, last year, its chair, Su Jiayin, was placed under mandatory measures, on suspicion of unspecified crimes. Basically, it was a Hong Kong court that called in the liquidators.

And the reason was that, in a way, outside China, Evergrande looked as a massively profitable distressed debt trade opportunity. There were 19 billion in defaulted offshore bonds with very substantial assets and, initially, a view that the Chinese government might prop up the property market.

So, large numbers of U.S. and European hedge funds basically piled into the debt, and they expected quite large payouts. But it seems as if this negotiation was, to some extent, controlled by a Guangdong risk management committee. And the authorities, basically, were very, very reluctant to allow offshore claimants to secure onshore revenues and onshore assets.

And, in fact, to stop the misuse of funds, I think about 10 Chinese local provinces actually took control of pre-sales revenues. They put it into custodial accounts, and the idea was that this money should basically—the priority is to ensure that the houses of people who’ve paid deposits on houses are actually built, and people who’ve undertaken work in building houses, are basically paid. So, that, then saw the value of these offshore bonds collapse very rapidly, indeed.

And I think that, to some extent, explains the concerns of the international financial market about the difficulties of this particular case. But I think, it’s clear that China intends, basically, to deflate this sector and to put an end to this speculative housing market as much as it possibly can, and to direct capital, towards productivity increasing, essentially, the industrial sector. And we shall talk about this direction of finance later on.

MICHAEL HUDSON: Evergrande debt, and other real estate debt, is to domestic Chinese banks and lenders. Certainly, many Chinese home buyers did not borrow internationally.

So, I want to find out how much the domestic Chinese banking system, or near banking system — not the Bank of China itself, but the near banks intermediaries who lent — to what extent have the banks given guarantees for the loans for Evergrande and others?

I understand that there are some guarantees domestically, and if the banks have to pay them, the banks will go under, just as occurring here in New York City. Do you have any information on that?

MICK DUNFORD: No, I don’t really have any information, except, I mean, some of the literature that I’ve read suggests that these creditors, bondholders and also other creditors, basically shareholders, are going to take a very, very major haircut.

RADHIKA DESAI: Exactly. I think that this is the key, that there will be an imposition of haircuts on the rich and the powerful, not just subjecting ordinary people to repossession of their homes, which they should have access to.

So, as Mick has already said, the Chinese government is doing everything possible to make sure that the ordinary buyers who have bought these houses do not lose out, which is the opposite of what was done in trying to resolve the housing and credit bubble in the United States.

So, I just want to say a couple of things. I mean, the Chinese government is quite aware, as Mick pointed out, the whole thing has begun by, this whole property bubble is in good part a product of the fact that when relations between China and the West were much better, China accepted some World Bank advice, and this is partly a result of that and the kind of deregulation that the World Bank had suggested.

But very clearly, now relations between China and the West are not good. In fact, they’re anything but good. China is unlikely, once bitten, twice shy, to accept such bad advice again, even if they were good. And now that they’re not good, there will be, and China is clearly looking at distinctively pragmatic, socialistic ways out.

And you see in the new address to the NPC by the Premier [Li Qiang], that social housing has become a major priority, not building houses for private ownership, but rather building houses which will be kept in the public sector and rented out at affordable rates. And I think this is really an important thing, really the way to go.

And finally, I would say that, the property bubble in Japan and the property bubble in the United States were bound to have very different consequences, partly because, well, for two reasons, mainly. Number one, the nature of their financial systems were very different.

In the case of Japan, the financial system was being transformed from one that resembles China’s financial system to something that resembles much more the US financial system. And Japan has continued this transformation and has suffered as a result. I would say in short, really, Japan has paid the price of keeping its economy capitalist. So in many ways is the United States.

And the second reason, of course, is that, funnily enough, one of the effects of the Plaza Accord was that, by the time the Plaza Accord came around, Japan was no longer interested in buying US treasuries. And as a result, the United States essentially restricted its access to US markets in a much bigger way. And so, essentially, Japan lost those export markets.

And it did not do what China is able to do. It perhaps could not do what China is able to do, being a capitalist country, which is massively reorient the stimulus for production away from exports and towards the domestic market, including the market for investment.

So I think that we are, maybe this is the cue at which we can talk about Japanification. So maybe you can start us off by commenting on this chart, and then Michael and I can jump in as well:

MICK DUNFORD: Ok, the blue line, of course, is the flow of loans to different sectors. So the blue line is the flow of loans to the real estate sector.

MICHAEL HUDSON: Only the Bank of China or by?

MICK DUNFORD:  All the banks. You can see from 2016, the share going to real estate has diminished very significantly, whereas, where it says industrial MLT, that’s medium and long term loans for industrial investment, you can see a very, very strong, steady increase in the share of loans going to industrial investment. In agriculture, it declines. And then also, that has actually increased since 2016. So this is a directing of investment towards manufacturing and towards the industrial sector of the economy.

So why is that? Well, I think the first thing one can say is that, in the past, basically, the growth drivers of the Chinese economy were, to some extent, export manufactures. But China was predominantly involved in processing activities, employing very unskilled labor and associated with very low levels of labor productivity.

So one of China’s goals is to significantly, basically, strengthen, upgrade the quality of these traditional industries, to make them digital, to make them green, and to radically increase productivity through a large-scale investment wave.

And then, secondly, we’re on the verge of a new industrial revolution, which Radhika has spoken about. So the aim in this case is, basically, to divert investment towards the industries that are associated with the next industrial revolution.

The other main growth drivers in the past, alongside this export sector, were obviously real estate, which, I mean, if you look at GDP by expenditure, was accounting probably with household appliances and furniture and household goods and so on, about 26, 27 percent of the economy.

But it’s a sector that’s associated with relatively low productivity, and of course, it was associated with very substantial speculation and generated very considerable financial instability.

So, as Radhika said, there will be, in dealing with this financial crisis, basically an underwriting of existing, of obligations to existing home buyers, and in the future, an attempt to establish a more sustainable housing market.

The other area of the economy was basically this sort of platform economy. But this platform economy was associated with very, very strong tendencies towards monopoly, and in the, about four or five years ago, a series of measures were adopted, basically, to restrict, some aspects of this platform economy, and other areas, like private tutoring, which was generating large disparities in the educational system, and is associated with the fact, that the cost of raising children in China is extremely high. I mean, it’s the second highest in the world after South Korea, actually.

So, these growth drivers, these old growth drivers, are basically seen as not offering potential to sustain the growth of the Chinese economy into the years ahead, and so there’s this attempt to look for new growth drivers. And basically, for that reason, you’ve seen this redirection of investment.

And I think one can distinguish that, from what happened to Japan, because basically, in Japan, industrial investment did not increase, largely, I think, because the profitability of investment was not sufficiently high. And also Japan, in a sense, adopted a neoliberal program. It didn’t implement industrial policies.

Whereas China is seeking to undertake this transformation, basically, through, it’s a kind of supply-side restructuring, driven by industrial policy, and driven by financial policies, providing strategic funding for industrial transformation.

Then linking that also to the transformation of education, to try to ensure that the output of the education system, in terms of skill profiles, and so on, corresponds much, much more closely with the profile of work and employment, with much more emphasis upon STEM, in the context of this new industrial revolution, radically raising productivity, and by radically raising productivity, you increase income, and ultimately, you’ll increase consumption, and so on.

So I think that the Japanification course is not one that China will follow, that China will actually address this need to innovate and transform its industrial system, in order to, in a sense, address the problems that are associated with the earlier drivers of Chinese development.

MICHAEL HUDSON: We probably need a whole other program to talk about the difference in structure. Real estate is the largest sector of every economy, and China is so different from Japan.

The Ginza district in Japan, right around the palace, that small district, was larger than all of the real estate value in California. So, we’re dealing with a huge debt finance explosion there, and then you have the largest collapse of property prices in Japan, everywhere, anywhere in the world.

In a way, what you’ve described brings us back to what we were talking about at the beginning of the show, about China’s structure. The effect of the real estate slowdown and falling in prices has a disastrous effect on localities, small villages and towns in China, who are dependent on real estate sales as funding their budget.

So, the real estate crash in China, if we’re talking about what policy is China going to take, how is it going to solve the problem of local budgets without solving it by creating a booming real estate market for towns to sell off their property to developers, and developers to make a profit selling off a property to private buyers, mainly.

I assume they’re not just selling it to the government to make a profit. I think there’s a lot of structure that I’d like to know. I don’t know what it is now, but it’s so different from what you have everywhere else.

I think that really is what I hope will be the focus of our show, the geopolitics of different real estate structures and the real estate tax that goes with it.

RADHIKA DESAI: That’s a really interesting question, and much of that we will be discussing in the second part of this show, which we’ll be recording in a week or so, I think.

But let me maybe then just bring this to a conclusion by simply agreeing with what both of you have said, which is that China has a very good chance, in fact, very likely, China is not going to follow the Japanification model because, as Michael is emphasizing, the structure of China’s economy and the imperatives generated by that structure are very different.

To name just one, if something is not profitable in a capitalist economy, it will not get done. Whereas in the case of the Chinese economy, the Chinese government can always say, well, if it’s necessary, we’ll do it even if it isn’t profitable, because it is necessary for the welfare of the people or the productive capacity of the economy, etc. So, profitability just does not play the role of a brake in the same way as it does in capitalist societies.

Secondly, the role of the state, both in terms of initiating new projects and taking responsibility for new projects, and we can already see in the current NPC and the discussions there that the role of the state is already once again expanding again in China, and it can continue to do so. And I think that’s a very good thing.

And remember also that, Mick, you emphasized in the case of when you were discussing one of the graphs, that the per capita GDP of China today is considerably lower than what it was in Japan, even in the late 80s and early 90s.

And that means that, number one, domestic consumption can be a big stimulus for further economic expansion. And secondly, of course, the industrial opportunities, the opportunities for a new industrial revolution are many, and China in particular, because of the important state role in the Chinese economy, the centrality of the state role in the Chinese economy, and the aim of the Chinese economy and the Chinese economy’s managers to develop China’s productive capacity in whatever way that works, not necessarily through private ownership.

These elements are actually going to ensure that China will exploit the opportunities of the new technologies much more effectively and execute a transition to the next industrial revolution much more successfully, and that will be an important road to avoiding what’s called Japanification.

MICK DUNFORD: You know, I think the difference is that Japan, I thought, in the 1980s was at the technological frontier, and China is not. But just, what Michael was referring to is the fact that in China, local government revenue came to depend to a very considerable extent on what is called land revenue.

You know, basically all land is state-owned, is either state-owned or owned by the rural collectives. But what happened was that if land was converted for use for urbanization, was converted for use for urbanization, for housing, then basically the local government could in effect sell leases, 90-year leases, or depending on the activity, different lengths of lease. They could sell these leases to developers. And then that revenue was used by local government to fund infrastructure.

To some extent that model has come up against limits. And I think, the issue Michael raised really concerns how in future will local government be funded, and will there be a reform in the system of taxation?

Will a property tax be introduced in order to generate government revenue rather than relying upon this land tax? Because of course that did encourage local government to allocate that land to people who are going to build housing for upper-income groups, because the implications for land value were under that situation, they would actually be higher rather than providing that land to construct housing for low income groups.

So, this issue of land revenue is one that has to be addressed basically by someone who’s an expert in public finance.

MICHAEL HUDSON: That should be what we talk about in the next show, I think.

RADHIKA DESAI: Great. So I think that we should bring this part of the show, the first part of this show to an end. And let me just do that by going back to our list of topics.

So just to conclude, we managed to cover the first four, although the question of Japanification and the alleged property bubble will resonate into all the rest of the topics, certainly the question of consumption, exports and China’s new growth strategy. So we will return to it.

But in the next [Geopolitical Economy] Hour, we will be talking about these topics, restricted consumption, exports, new growth strategy, and of course, China’s foreign economic policy.

So thanks very much both. Thanks to all the listeners. And we look forward to seeing you in another week or two. Thank you and goodbye.

Source: https://geopoliticaleconomy.com/2024/03/13/china-economy-radhika-desai-michael-hudson/

Part II

The truth about China’s economy: Debunking Western media myths

Published 2024-03-28

Political economists Radhika Desai and Michael Hudson are joined by Beijing-based scholar Mick Dunford to discuss China’s economy and debunk Western media myths, addressing accusations that consumption is too low, fears of “Japanification”, the role of exports, and the new Chinese growth strategy.

Transcript

RADHIKA DESAI: Hello and welcome to the 25th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton, our videographer, Paul Graham, and our transcriber, Zach Weisser. Today we are going to take up where we left off last week on the subject of China’s future. What is it to be? Economic decline, as frequently predicted by Western pundits? Or is China going to be launching the next industrial revolution?

And as last time, we have with us Professor Mick Dunford, Professor Emeritus of Geography at Sussex University, and now working at the Chinese Academy of Sciences. He keeps a close watch, among many other things, on China’s economy. Welcome, Mick.

MICK DUNFORD: Thank you very much.

RADHIKA DESAI: As we pointed out last time, China’s breakneck growth has not only aroused envy in the West, but also prompted the proliferation of doomsday predictions about China’s economy. We are told that we are at “peak China”, that China can only go downhill from here, that China’s property bubble is about to burst and throw China into a morass of Japanification and secular stagnation, that China has been stealing technology all these years, and the stolen technology has been powering the growth. And now that President Biden is going to make it impossible for them to do so, that China will stop growing, that China has a serious unemployment crisis, that President Xi’s authoritarian leadership is stifling growth by stifling innovation and entrepreneurship. China, of course, is involved in terrible things like debt-trap diplomacy vis-à-vis the rest of the world, etc., etc.

You know how it is. You’ve all seen the long list of accusations. And in the last show and this one, we are debunking these myths.

Now, we had organized our discussion around certain topics, which I will show you in a second. Here we go. So, we had organized, these were the topics. We discussed how to characterize China’s economy, how to understand China’s growth story. We took a closer look at China’s COVID response. And then we had a really exhaustive and long discussion about the alleged property and debt bubble in China and whether it’s going to lead to Japanification.

And we emphasized that for a number of reasons, including the fact that China has a very different growth structure, a very different financial sector, a far more effective industrial policy, etc., etc., that China was not in the least in danger of Japanification.

So, today, we want to take up the next four topics. We’re going to be talking about whether China has a problem of restricted consumption and whether this is why China’s growth is down and whether there are going to be stagnant living standards, of course, then affecting the legitimacy of the Communist Party’s rule, etc.

We will then talk about the role of exports in China’s growth story and how we may expect this to change, because there’s a lot of myths around that as well. We are told that if China cannot export to the same extent, it will, of course, suffer from stagnation.

We will then more qualitatively discuss the main elements of what is China’s new growth strategy. And finally, we will debunk some of the myths that surround China’s international role, myths such as China is engaged in debt trap diplomacy, that it only wants to find employment for its surplus labor and markets for its surplus commodities and resources for its hungry industries.

So, that’s what we plan to do today. So, why don’t we just get going? Maybe we’ll start with you, Mick. Do you think China has a restricted consumption problem?

MICK DUNFORD: Okay. I think the first thing to say is that China remains an upper middle income country. So, obviously, average levels of consumption are smaller than those in economically much, much richer countries.

Can you show the chart of consumption and investment?

So, if you look at this chart, which starts in 1950, you can see that over the course of time, the share of consumption expenditure in gross domestic product has declined. Household consumption in recent years has been in the region of about 38, 39 percent.

Early on, consumption levels were much higher when the country was much, much poorer. And as the share of consumption declined, the share of investment increased, which we shall speak about in a little while. I mean, the chart also plots net exports, and you can see that net exports have declined. And the share of GDP has declined. And the share of GDP has declined. And the chart also plots net exports, and you can see that net exports have declined somewhat in recent years.

But this decline in the share of household consumption expenditure has occurred as GDP has increased at astonishing rates. So, the actual real value of consumption in China has increased enormously over the course of time, and it continues to increase at this present point in time. So, it’s a country, well, it has 400 million people who are in middle income categories. And so, partly because of that, it has an enormous market.

But I want, when people point [out] trends in consumption, I think it’s quite important to think about the way in which China’s recent poverty alleviation record has actually fundamentally transformed the consumption possibilities of very, very low-income people.

Can you show the chart, Radhika, please?

Ok, this is a map of what are called contiguous destitute areas. So, basically, 10, 15 years ago, almost all the poverty counties and all the poverty villages and most of the poverty households were actually concentrated in these largely mountainous rural areas. I won’t point them all out, but you have the south of Xinjiang, you have virtually the whole of Tibet, you have Tibetan areas that are in four other provinces, you have the Wuling mountain area, almost all of them are mountain areas, Wuling mountain areas in four provinces.

Now, in these places, there were 80 million people whose income was less than $1.96 per day. It’s important to say that rural Chinese people have important assets, because they have contracted land on which they can grow food, they have what is called a JGD on which they can build their own home, and they also grow their own food. So, cash income is not the only criterion by which you should judge the welfare of people who live in rural areas, but their cash incomes were very low and often depended upon the fact that people from these areas would go to work as migrant workers in other parts of China.

But, between 2013 and 2020, every single one of these people were lifted above the poverty line and often lifted well above it through an extraordinary program of poverty alleviation. So, this is one case where you saw massive increases in the consumption possibilities of the poorest people in China.

So, the idea, that China has a consumption problem, I find quite curious in the light of this extraordinary achievement. And the point is, this program has not ended, it continues. And so, the whole aim is, to move, as I say, in the direction of common prosperity, which means continuing to lift the income of these people so that they start to ultimately start to join middle income groups. And as they do, and as they spend, and obviously consumption will increase quite significantly in the years ahead, and it’s one of the reasons why China has an opportunity to continue to grow for quite a considerable period of time.

RADHIKA DESAI: That’s exactly it. And I’d like to point to another dimension of this by showing you this chart.

You know, Western complaints that China has a restricted consumption problem, that really what China needs to do is to increase the incomes of its, increase the consumption of its people, is really, according to many people, according to many scholars, it’s really a way of, for Western countries to retard China’s growth.

Because essentially, if you think about it, consumption plus investment is total GDP. So, if you increase the share of consumption, you’re going to decrease the share of investment. And what it will do becomes very clear from this chart.

So, in this chart, we’re looking at investment or gross fixed capital formation for China, and then for the UK, US, Japan, and the world. So, China is this red line here that you see, and the UK is this orange line, the United States is the blue line, and the world is this purple line.

And what you see here is that basically, and the chart goes from about 1960 to 2022, so you can see that China has grown essentially by increasing the share of investment in its GDP. And the slow growing country, so Japan for a while, of course, had a fairly high, although China’s share of investment of GDP today is higher than what Japan’s was in the heyday of Japan’s growth at close to 40 percent. In China’s case, it is above 40 percent, reaching in some cases to 45 percent. But what you see in the case of Japan as well is that Japan’s share of investment to GDP began declining, and declined particularly markedly in the early 1990s. And today, it is kind of at the world average. It is higher than that in the United States and the UK, but it is at the world average.

So, these are essentially the slow-growing parts of the world economy, and they are characterized by a low rate of investment, which, in the case of the US, it is actually under 20 percent. In the case of the UK, it’s actually under 15 percent. And it’s no wonder that these economies are ailing. And the reason is simple. Investment is absolutely critical to expanding production, and also increasing productive efficiency. You always need an investment. And so, you increase productivity efficiency, you increase productivity, and therefore, you increase the capacity of people to increase their own material welfare, if you think about it, in terms of what it means on the ground. So, this is very, very important. And study after study has shown that in terms of—

Many factors affect growth. But if there is one factor, which is almost always emphasized as being critical for growth, you can’t have growth without this, it is investment. So, this idea that China is suffering from lack of investment is ludicrous. Yes, the share of consumption versus investment is lower, but that is not incompatible with increasing levels of material welfare, which indeed China has been experiencing in the recent past.

MICHAEL HUDSON: Well, I think part of this investment consists of housing, and housing does not appear as part of consumption, because that’s a balance sheet relationship, ownership. But to the extent that this capital formation takes the form of housing, that actually is consumption.

In the real world, if we look at consumption as, how you’re living in a house, and you include having a house of your own as a part of consumption. So, actually, there’s a direct correlation, feedback, and almost identity between capital formation and consumption in the form of residential housing.

RADHIKA DESAI: Mick, did you want to add anything?

MICK DUNFORD: Well, I mean, I just said, I mean, the point is that if you invest, you employ people, the people who are employed receive wages, those people will then use some of those wages in order to purchase goods and services. So, investment actually also gets translated into increased consumption.

And I can’t remember the precise numbers, but there was a very interesting study done in Singapore, which actually showed that investment generates in industrial activities in particular, which is what China is actually targeting at this point in time. Investment in industrial activities generates far, far more jobs than does investment in services.

I mean, if you simply try to fuel a consumption boom, then to some extent, what you will fuel is a growth of services, which generally speaking, are very low productivity and do not generate the jobs that you will ultimately generate if you go down an investment path.

RADHIKA DESAI: And I think there’s also a couple of other elements to this story before we leave it, maybe we should take a look at that. So, one of the reasons or one of the outcomes of China’s consistently high rate of investment has been, of course, China’s climbing share of world manufacturing. So, here you have China’s gross output and value added in manufacturing versus NAFTA’s and the UK’s.

Mick, this is your chart, actually, maybe you want to speak to this.

MICK DUNFORD: Well, in a sense, it speaks for itself. I mean, it shows that China has actually come to account for an enormous share of industrial manufacturing “value-added”.

I mean, in the United Nations Industrial Classification, there are 500 categories. China has a presence in every single one of those categories, and it leads the world in about 40% of them. So, it basically is the only country in the world that has a completely comprehensive industrial system. And that is very, very important, because that lays the foundations for industrial upgrading, because in a sense, it means that, I mean, obviously, there are a few critical sectors where China has certain gaps at this point in time. That means that China has this kind of comprehensive industrial system, which enables it, if you like, to generate a process of investment that will generate very strong growth internally within China.

RADHIKA DESAI: Indeed, in fact, what I’m reminded of as well in this case is the simple fact that China, as a result of these investments, has also acquired its technological lead. So, there was a recent report published by ASPI, which is the Australian Strategic Policy Institute, normally a terribly anti-China outfit, but this, and they are basically just playing Cassandra, of course, for the West.

But this report pointed out that China’s global lead extends to 37 out of 44 technologies that ASPI is now tracking, that China is, and this covers important technological fields like defense, space, robotics, energy, environment, biotechnology, artificial intelligence, advanced materials, and quantum technology.

So, you can imagine that this idea that China should somehow decrease the proportion of its income it spends on investment and increase consumption is essentially a recipe for essentially restricting China’s growth.

And then there are also a couple of other points I’d like to make, and this relates to exports, because, of course, exports is also part of what would be— exports plus investment plus consumption is total GDP. And so, here we have China. It is true that between about the 1990s and the mid-2000s, I would say that China’s exports as a share of China’s GDP went from a low of about 10% in the mid-1980s to a peak of over 40% in the late 2000s.

But since then, particularly since 2008, it has declined. And even though it has declined, China’s growth rate remains substantially above the growth rate of the advanced countries. You know, China’s exports as a share of GDP for China today is substantially lower than that for Germany, as you see, which remains quite dependent on exports, partly, of course, because of the existence of the EU.

And here’s another chart that is also quite interesting.

Because this is kind of a nice segue into talking about China’s growth strategy as well. Because what you see here, in fact, let me show another chart first. Mick, this is your chart. Maybe you start with this one, and then I’ll show the other couple of charts.

MICK DUNFORD: Yes, well, I mean, this chart plots world GDP growth from the middle of the 1960s and also plots, well, actually from the early 1960s and from the middle of the 1960s, it plots world export growth. And what it shows very, very clearly is that one can say certainly up to the North Atlantic financial crisis, the growth rate of world exports, this is real growth, considerably exceeded the rate of growth of world GDP. And since then, the rate of growth of exports has slowed very, very significantly indeed, and generally speaking, only barely exceeds the rate of GDP growth.

In the case of China, this change in the global situation obviously is one of the reasons for China’s somewhat slower growth, although as we’ve insisted, China’s rate of growth is still consistent with its long term objectives in relation to increasing GDP by, and GDP per head by 2035.

China’s exports grew at something like 18.1% per year up until the financial crisis over a period of nearly 30 years. That’s quite astonishing. Then with the financial crisis, they dropped to 9.4%. And then since 2013, it’s grown at 5.7%. So obviously Chinese exports are growing much less quickly. Because exports are growing less quickly, of course, many of the private sector firms that were export-oriented, have been reluctant to invest. And if they go to a bank asking for credit, it obviously is going to be more difficult to get credit unless they actually have a strategy, which is clearly designed to upgrade and move up the value chain.

So China, China’s export, in a sense now contribute less. And that’s one of the reasons why China is undergoing this current process of structural change. This is a process of structural change that, as I’ve said, is amongst other things designed to significantly upgrade existing industries, not to abandon them, basically to use new technologies in order to upgrade and improve the quality of these industries. So they continue to play an important role.

Although at the same time, because of the growth that we spoke about earlier in the size of China’s domestic market, the domestic market, as we shall probably explain in more detail later, is going to be a significant focus of future growth.

MICHAEL HUDSON: This is probably going to continue. The interesting thing is to look at Germany, which was at the very top of the chart. We know that Germany’s exports are not going to increase because of the sanctions against Russia, and also because of China’s creation of its own automobile industry. It’s not importing BMWs. BMW has moved its production to China. China is not importing chemicals from Germany because BASF has moved its chemical operations to China.

So you’re having a movement of Germany into China, and much of the increase and the decrease in world trade relative to GDP, which means domestic self-reliance, is a result of China’s role itself. These charts would be quite more emphasized if we had China on the one hand, and the rest of the world without China on the other. So you’re having China’s import displacement for much of this as it becomes more self-sufficient. This is sort of a model, not only for China, but for the whole Belt and Road Initiative that it’s trying to put together to make them independent of the US and NATO countries, because the US and NATO countries have already said, we don’t want more trade with China.

You’re having the World Trade Organization really coming to an end. In today’s Wall Street Journal, for instance, there’s accusations that we’ve got to ban all Chinese exports because Brazil has brought an anti-dumping rule against China. Anti-dumping means the government is supporting development. Well, of course, the government’s supporting development. Anti-dumping, you’d have to ban all American exports, especially agricultural exports, all Chinese exports. This is simply a legal means by the US controlled international diplomacy to isolate China.

But of course, the result is that it’s isolating the NATO countries from what’s becoming the whole Chinese sphere, that it’s going to be independent in itself. And if you would do, say, the Eurasian sphere versus US-NATO, you’ll have a very interesting contrast there. Very little, less and less trade between the world majority and the US-NATO, but much more domestic trade, which will not appear as trade at all because it’s domestic.

RADHIKA DESAI: You know, absolutely. And I just wanted to share this chart once more, just make a couple of points about this.

You know, this whole, what you’re looking at here is a quantitative story, but there is also a qualitative story hidden there. And Michael, you just referred to it, which is that, this peak of exports was really a peak, generally speaking, of trade among, on the one hand, the US and Western countries, and on the other hand, China. And to a lesser extent, some of the other BRICS, but that was the main story.

Now, after this dip, if and when world trade recovers, it will have a very different structure in which China remains central to the story. But increasingly, China’s trade partners will be a rather different set of countries, precisely because, this dip, the dip of export of goods and services, okay, it’s gone up a little bit here. But quite frankly, if Biden’s strategy, foreign policy continues along its present path, which is causing conflict, expanding sanctions, etc., etc., and proliferating conflicts across a range of theatres, this is only going to essentially isolate the West and take it out of, as Michael, you were saying, out of the trading relationships of the world, and so on. So, this is a qualitative change that we are looking at. And I think, and that’s one thing.

The second thing is, of course, that in, as far as the consumption story is concerned, actually, a good part of what China does not export, as Mick was saying, actually becomes part of the internal consumption of China. And as you’ll see in a minute, China’s new growth strategy directly involves the expansion of the consumption, in quantitative terms, not in proportional terms, but in absolute quantities, the expansion of the consumption of the Chinese people.

Because remember, at the time of 2008, when China’s economy was delivered this short, sharp trade shock, China’s economy turned, this giant economy turned on a dime. It said, okay, if we cannot have access to those export markets, first of all, we are going to engage in a massive investment drive. And so, the next two or three years, China engaged in a massive investment drive. And then as that came to an end, China has explicitly followed the policy of allowing wages to rise, so much so that many industries that relied on low wages are no longer economical and profitable in China anymore. And they are moving elsewhere, which is fine, which is as it should be, because China is expanding other more high productivity industries, as Mick and others have pointed out. So, that is the qualitative story.

And I just wanted to show you this chart as well, which only goes to about the mid-2010s, but I would say the story continues today.

What you see here is this red line shows China, gross exports as a share of gross output or GDP from 1995 to 2017. And you see that this is the developing countries excluding China, and this is China. So, first of all, compared to other developing countries, China’s reliance on exports was considerably lower. And then what you also see is that it has actually been going down.

That is to say, China’s growth, the market stimulus for China’s growth is increasingly coming from China’s own economy. And the same goes for the import of intermediate inputs. China is importing fewer intermediate inputs, which means that firms within China are increasingly producing the inputs that were previously being imported into China. So, in that sense, growth in China and also in the rest of the developing world, though to a lesser extent, is becoming less reliant on trade growth.

And this is a chart which I got from Richard Baldwin, one of his blogs.

And it also shows similar things. Export-linked manufacturing as a percentage of manufacturing. It peaked for China in about 2006, and then it has declined. And domestic sales of China’s manufactured goods, it shows, is growing faster than export sales. You see here this blue line is domestic sales.

So, you can see that more and more of what China is producing is being produced and in many ways even preferred by China’s citizens. So, this is a really welcome development. And as China moves to the forefront of technology in a range of fields, this will only increase because why would you buy a foreign item if it is technologically inferior to your domestically produced items? So, those are some of the things that I wanted to bring out.

MICK DUNFORD: Can I just, I mean, re-emphasize some of the very important points that Michael and you, Radhika, just made.

I mean, in that period up until the financial crisis, China had very large export. And it was basically exporting goods predominantly, as you said, to Europe and to the United States. But Europe and the United States, with the exception of Germany, were countries with huge trade deficits. So, this model was only sustainable insofar as trade surplus countries lent their surpluses to the richer countries in the world to enable them essentially to live beyond their means.

So, what’s come to an end, or coming to an end, it seems, is that particular model.

But at the same time, it’s important to recognize that China, even today, is the main trade partner of 140 countries in this world. But these countries are largely part of the Global South. So, they’re countries that in the recent thirty— in the recent neoliberal era have actually grown relatively slowly. And that’s one of the reasons for this relatively slow growth of world trade recently, which has come to depend more on them.

But I mean, if you look at China’s trade, it’s being reoriented significantly towards these countries. And if one puts in place a system of trade, which in a sense is win-win, then it’s quite conceivable, as you said, that in the course of time, South-South trade is going to grow very substantially. And I mean, China has a very, very strong commitment, to the maintenance of an open world economy, and in the establishment of complementary relationships.

So, it’s quite conceivable, as you said, that while you’ve seen greater growth of the domestic market, more emphasis on the domestic market, in the longer term, the export market will continue to, play a really very significant role in China’s growth. But it will probably be much, much more connected with the development of other parts of the Global South.

RADHIKA DESAI: In fact, that reminds me of another point that I meant to make. And that is that, you wrote a very fine piece recently in, I forget the journal now, but, and I commented on that, you said that a large part of what’s going on right now is that China’s international policies, foreign policies, foreign economic policies are directed towards reshaping the international environment in a certain way, which allows it to continue what it calls globalization. And I’ll come to that in a minute, to increase international trade linkages, in a positive way for mutual benefit, rather than to subject other countries to imperial subordination, etc.

So, in that sense, the Belt and Road Initiative, or the lending and investment policies and what have you, all of these ways are attempts to reshape the international environment.

And in this, by the way, in many ways, I would say that the West has given China a great gift by prosecuting its proxy war against Russia, because it has driven Russia into the arms of China in a more certain way. I mean, this was already happening, but it is now happening in an accelerated fashion.

And just think about it. China and Russia are two economies with such enormous complementarities that they can only get more and more increasingly integrated, because Russia has a small population and vast resources, and China has a large population and, well, China also has a lot of resources, but it can do with more resources. So, in that sense, energy and trade, that China-Russia energy and trade relationship has deepened massively over the last two years, and it will continue to do so.

And I also wanted to say that the same, Russia is doing the same thing. Russia, just yesterday, we had an International Manifesto Group webinar with key foreign policy experts from Russia talking about a new report entitled “Russia in the World Majority”, or “Russia’s policy towards the world majority”, in which they point out that Russia is engaged in a massive reorientation of its foreign economic and political policies precisely in order to reshape the international environment in a way that is conducive to their growth.

And in both of these cases, unless the West really changes tack in a major way, it’s going to get left out. And this re-formation of the international environment is going to reorient the world economy with China as its motor, Russia following along, and the rest of the world majority countries as well.

MICHAEL HUDSON: You’ve put your finger on the key, Radhika. I think President Biden, and before him, Donald Trump, have done a great service to the whole world. They’ve said countries have to be more self-sufficient for themselves. You can’t depend on the United States because we may do things to hurt you. You’ve got to be self-sufficient. And I know that you’re neoliberal, you want trade, but we’re going to help you be more self-sufficient by imposing sanctions to really force you to defend yourself and to create the independence, because we know that you’ll be much better off being self-sufficient.

And that altruistic sacrifice of U.S. trade and U.S. economy to help China and Russia, I think they deserve the peace prize.

RADHIKA DESAI: Quite right, exactly. The inadvertent peace prize.

Okay, so I think we’ve dealt with the whole issue of restricted consumption, stagnant living standards, investment, etc., and also the matter of exports and the role of exports in China’s growth story.

So now perhaps we can talk about China’s new growth strategy. And Mick, we know that you’ve been doing a lot of work on this, so perhaps you can start us off by talking about what you take to be China’s growth strategy.

MICK DUNFORD: You know, I think the first thing to say is that, I mean, if you think about China, you know it’s a country that in 1949 embarked on a transition to socialism. And, as it moved forward it encountered various problems, and as it encountered problems it introduced reforms to address those problems. And it’s gone through a series of phases, you know.

In the early period it was basically embargoed by the United States until the early 1970s, and then it started to open up to the world. And then after about 2010 you had the pivot to Asia, and the United States started again to try to constrain China’s growth. So that context has been particularly important in shaping China’s development.

But, from reform and opening up it basically developed by entering the neoliberal world economy in a managed way. But in the course of that it encountered a lot of difficulties, in terms of the impact on the environment, the impact on inequality, the impact on corruption, and so on. And so it has seen aspects of its modernization process that do not really endear it to Western path to modernization.

So one of the really important things about what is happening in China now is that it is talking about a new path of modernization that is different from the path that was followed by the Western world, and it involves many dimensions.

Obviously it involves important emphasis upon productivity increasing technologies, and then the critical thing is, what drives growth is actually the diffusion of technology, the rapid diffusion of technology. And the rapid diffusion of technology depends on investment. So investment in a sense leads to rapid uptake of productivity increasing investment.

So obviously this technological upgrading is a critical part, and that relates also to the view that the previous drivers of China’s growth are no longer. Well, either, they were associated with monopoly behavior or they were not associated with high productivity. So you had a low productivity, low wage export sector that needs to be upgraded. You had a platform economy that consumed vast amounts of capital, but because of the rents that are associated with monopoly positions, and you have the housing market, the real estate system, which we spoke about in the last discussion.

So, China wants to change growth drivers, but at the same time is concerned about what it calls ecological civilization. You know, in other words, establishing a harmonious relationship with the natural world. It’s concerned about the enrichment of the spiritual quality of life, and this is very interesting because it relates to a kind of criticism, of what has been observed, looking at some of Western societies and the way they’ve become extremely individualistic and very highly fragmented.

And also, the way in which, a whole series of developments in education and so on are associated with, how can I put it? You know, in a sense, they want to improve the quality of everyone’s cultural life and increase the sort of spirituality of human existence.

And then it’s also, of course, closely linked with the idea that they need to improve their own systems of democratic accountability and governance. And it’s also linked to the idea that development is only really possible in a peaceful world.

So China has a different view about the path to modernization, and that goes hand in hand with this attempt to implement structural change in the economy by directing resources towards productivity, increasing investment, and also, taking up this issue of internal circulation that you have written about and discussed, Radhika.

Article XIII – Promoting domestic-international dual circulation

Based on domestic great circulation, we will coordinate and promote the construction of a strong domestic market and the construction of a trade powerhouse (贸易强国), form a powerful gravitational field to attract global resources and factors of production, promote the coordinated development of domestic and foreign demand, imports and exports, and the introduction of foreign capital and foreign investment, and accelerate the cultivation of new advantages to be used in international cooperation and competition.

-from China’s 14th Five Year Plan

RADHIKA DESAI: This is from the 14th five-year plan, so that would have been five years, no, five years ago, more than that, maybe 10 years. 2014. 14, that’s right. It was 10 years ago now.

So, essentially, like I was saying, in order to deal with the shock of 2008, they had first a massive investment drive. And then, within a few years, they were already pointing out that a large part of the stimulus for China’s growth must not just come from outside, but also from the domestic economy.

So, Article 13 of this policy refers to promoting domestic international dual circulation. And it says, based on domestic great circulation, we will coordinate and promote the construction of a strong domestic market and the construction of a trade powerhouse. So, both domestic market and foreign market are important to form a powerful gravitational field to attract global resources and factors of production, promote the coordinated development of domestic and foreign demand, imports and exports, and the introduction of foreign capital and foreign investment, and accelerate the cultivation of new advantages to be used in international cooperation and competition.

So, the expansion of the domestic market was made into an explicit goal. And that, I think, can only be a good thing, because at the end of the day, what is development about but increasing the material standards of living of ordinary people, increasing their consumption of meaningful things, obviously, not just superfluous and, in fact, sometimes even harmful goods that we often end up counting as part of consumption in Western countries.

But there’s an associated theme here that I also wanted to bring up, because I promised earlier that I would clarify what I mean by the Chinese meaning of globalization. You see, in the West, we think of globalization as essentially an ideology, and as Western governments promote it, it is an ideology of free markets and free trade. The idea is that the government should step back from any role in the economy and should not try to manage trade flows, capital flows, investment flows, etc., etc.

This is the meaning of the term globalization in the West, and the purpose of this meaning is actually not, the West continues to practice all sorts of protectionism and regulation and what have you, but the purpose of it is to open up the rest of the world’s economies to Western corporations, Western capital, Western commodities, and, of course, open them up in order that they may supply Western needs for resources, cheap commodities, cheap labor, cheap manufactured goods, etc., etc.

So, this is the Western meaning of the term globalization, and as most people will recognize, the essence of it is to subordinate most of the economies of the world to Western economies. It is an imperial subordination project.

In China, it means something completely different. In China, the Chinese kind of recognize the simple elemental economic adage that the more you have a division of labor, as Adam Smith pointed out, the more we can all benefit. So, we can all benefit from specialization, we can all benefit from increasing scale of production, and so on and so forth, but this should not be done in a zero-sum game. This can be done and should be done for mutual benefit.

And in order to ensure that there is increasing economic interconnection within the economies of the world, all economies have to continue to benefit. One of the results of globalization has been today de-globalization because it has harmed economies to the extent that it has. If you manage the process for mutual benefit, then it actually becomes a more sustainable process.

So, the Chinese look at increasing international interconnection as a managed affair in which states do regulate trade flows, investment flows, etc., etc., in order to achieve mutual benefit of the economic partners, whoever they may be. And I think this type of globalization China will continue to promote and is continuing to promote in these attempts, as I referred to earlier, of trying to reshape the international environment to something that is conducive both to its own growth and that of the rest of the world.

And in fact, that’s something that Western imperial powers have not allowed because they say that you want to have a growth both of domestic and foreign markets, and China’s investments in the rest of the world are doing exactly that.

MICHAEL HUDSON: What you’re saying, Radhika, is that China’s concept of growth is very different from the concept of growth in the United States or in neoliberal economics.

Much of what you’re talking about doesn’t even appear in GDP because it’s largely redistributive. It has to do with the quality of life. It really is: what kind of growth are you going to have? That’s what the issue that China’s development is posing for the whole world and what we’re talking about.

We talked about providing housing, providing better living standards. If you provide education for free, is that growth? If you provide medical care for free and it’s not part of the market, is that growth?

In the West, they say, what is part of the market, especially excluding government? And China looks at the whole economy and says, no, we’re looking at growth of the whole society as an organism. We’re talking about transformation. Transformation and redistribution is much more important than growth. That’s not measured by GDP, but you pointed out the qualitative aspect of what the West views simply as quantitative changes.

RADHIKA DESAI: Exactly, yeah. Did you want to add anything, Mick?

MICK DUNFORD: Well, if I just come back in relation to what you said about China’s view of globalization. China sometimes describes itself as “socialism with Chinese characteristics”. And Chinese characteristics are actually very important in many ways. I mean, Chinese thought is obviously a synthesis of Marxism, but also with earlier Chinese traditions.

If you look at Chinese ideas about international relations, the core concept, the core concept is harmony. I mean, actually, it’s one of the core concepts in Chinese thought, the idea of harmony and living in harmonious relationships with others, which means understanding the kind of internal dynamic of others and then working with them to develop their potentialities, rather than imposing.

The Western model is that you sort of imprint, your model on something where instead of looking at their own internal capabilities and helping them move in a positive direction.

So some of the core concepts in Chinese international relations are things like guānxi (关系), or “relationality”; or gòngshēng (共生), which means symbiosis; or tiānxià (天下), or “all under heaven”.

And that leads to these ideas that the way you help yourself is actually by helping others. So by helping others, you actually help yourself. So it leads to a quite different view about the way in which the relations between countries should be organized, the principles governing the relations between countries.

It’s obviously very difficult to act in this way if there’s a bully in the room, which at present there is. But I mean, even in the face of that bully, you can see that China tries to hold its principles as far as it possibly can.

So I think that is quite important. I mean, that’s associated with, if you like, a mutually supportive approach to working with other countries and trying to find complementarities. And that grows out of a different tradition of thought, that is rather different from the Western tradition.

And that’s also why, China speaks about a rather distinctive and different path to modernization. And that’s why they come up with these initiatives, like this global civilization initiative, or this global indivisible security, although it was Russia, that before the start of the conflict in Ukraine, insisted on this issue of indivisible security in relation to European security. And then this global development initiatives.

So, it’s important that we start to look at the existence of other traditions of thought in the world and start to understand the variety and multiplicity, of human civilization and the way in which those civilizations can work together and cooperate in a different kind of global order from the one that’s prevailed, for the last 500 years, when the Western world basically seized on Song Dynasty innovations to embark on a process of colonialism and conquest.

RADHIKA DESAI: Quite right. I just wanted to pick up on one, a very deep point actually emerges from what you were saying, because you know you were emphasizing harmony. And I think that, of course, the Chinese value harmony and the West can say, well, we value harmony as well, except that in the West, from the earliest beginnings of capitalism, there has been an extremely odd conception of harmony, which is supposed to spontaneously arise from the workings of the market.

And in that sense, and even though actually spontaneously capitalism, market society, whatever you want to call it, has actually produced a lot of conflict. The ideological commitment to the market has always meant, and therefore to markets, private property, profits, all these things, has always meant that no matter how much evidence piles up that market relations are producing conflict, unregulated market relations are producing conflict, both domestic conflict and international conflict, the West sticks ideologically to this notion that, you are going to have harmony out of markets.

Whereas the Chinese conception realizes that harmony is a value and you have to work to produce harmony. You have to do it through deliberate actions of both households and businesses as well as governments. So, harmony is not spontaneous. It is something that is consciously aimed for and produced. And that is the difference.

I think that increasingly as China plays a leading role and its demonstration effect, how it manages its economy, how it manages its international relations, its demonstration effect will underline the truth that harmony is something that is desirable, but if we are to get it, we must work for it. We must build it through deliberate actions. So, I think this is a very, very important thing. And in this sense, the Chinese are extremely pragmatic. They will do whatever works, whereas I think in this context, the West is appearing more and more ideological in its commitment to this weird ideology that somehow markets produce spontaneous harmony.

So, maybe now that we’ve talked about China’s growth strategy, and this is a very perfect segue into talking about China’s foreign policy, particularly the accusations that are made against China of creating debt trap diplomacy. I mean, and by the way, I should say that we are going to talk about a lot of things, but people who are curious about China’s foreign economic policy and accusations that China only wants to export its labor, that China only wants to grab the world’s resources, etc., and is engaged in debt trap diplomacy. We will be discussing that in particular, but please also go to the Johns Hopkins University’s China-Africa Research Initiative website that has exceedingly valuable statistics and reports and blogs about this matter.

But Mick, I’m going to show the chart that you wanted to discuss. So, we’ll start off the discussion with this chart. So, go ahead.

MICK DUNFORD: Yeah, I mean, I think, the first thing I want to say is, if you look what China does is it basically builds, high-speed rail, ports, power plants, factories, roads, constructs social infrastructure, and it’s established certain or cooperated in the establishment of certain financial institutions, that do lend to the developing world.

This chart actually plots Chinese credit, so it’s the debt of the rest of the world, the developing world, to China. And the chart on the left simply indicates the way in which debt owed to China has, of course, increased over the course of time as a result of Chinese development assistance and China’s lending, especially to parts of the Global South.

What I want to emphasize, however, is what the chart on the right shows. So, the one on the right records the share of gross national income of total debt, I should say, of total debt. And it does it by looking at the World Bank grouping of countries as least developed, low income, lower middle income, low middle income, middle income, macro middle income, and then separates out sub-Saharan Africa.

I mean, one of the very striking things about China is that a large share of its lending is, in fact, to very low income countries. It lends more to the least developed countries in the world than do the multilateral institutions and do the OECD group.

But if you look, if you see the least developed countries, their total debt to the rest of the world is 43% of their gross national income, which is, nearly one half, a very substantial share. But of that debt, the share owed to China is only 5.5%. And Chinese debt amounts to 12.8% of the total. Now, I mean, if you take the famous case of the Sri Lankan port of Hambantota, I mean, that issue blew up because Sri Lanka had to repay, Sri Lanka’s debt to China was about 10% of its GDP, 11%, but it had to repay debt to the Paris Club and to multilateral institutions.

So that is fundamental debt problem was debt to these institutions and not debt to China. Although Sri Lanka is not in the least developed case.

If you look at low income countries, China’s share is 5% of GNI. China’s debt is 5% of GNI. Their total debt is 51.4% of gross national income. And then you can work your way through the list. I mean, if you look at sub-Saharan Africa, 43.1%, their debt is 43.1% of the gross national income. This is data from the IMF for [2021].

So, 43% of GNI debt, which obviously is an excessive level of debt and is a serious impediment to the development of these countries. You know, especially, if this debt is not used to fund infrastructure and other kinds of activities that are going to generate income and enable them in a sense to disindebt themselves.

But China’s share of GNI is 4.3%, and its share of the total debt of sub-Saharan Africa is 10%. So these claims about a debt trap are, in a sense, simply do not stand up empirically.

And it’s very interesting to go back to where that notion came from, because it came from a book, I think, written in the 1970s. What was it? I can’t remember the precise title. Michael will tell us about “Disclosures by an Economic Hitman”, who was actually talking about what the United States did. So it’s very curious, that that thesis has been applied without any real justification to China, simply in order to discredit China’s very significant contributions to the development of the Global South and the very significant contributions of the BRI, which also, receives completely unwarranted criticism.

I mean, obviously, some things do not work as they’re meant to work out. But I mean, the degree of criticism of these projects is absurd, in fact.

RADHIKA DESAI: Indeed. Sorry, Michael, please go ahead.

MICHAEL HUDSON: It’s very important because it’s obvious now that much of the Global South cannot pay its international, its foreign debt, its dollarized debt. And we’re back in a situation very near to 1982, when Mexico’s default on its Tessobonos led to the Latin American debt bomb.

Now, the United States realizes that there’s going to be a debt write-down. The bank lobbyists, people like Bono, say, well, the government should now forgive all of their debts to the Third World so that all the money that the governments have can be paid to private bondholders. So Bono is the lobbyist, basically, for the private bondholders. Instead of the government taking priority, as it does under international contracts, the money would be paid to private holders.

But for the government debt, Mick, you’re absolutely right. The reason why the Global South has a right to annul its debt to the World Bank and to the IMF has been that these loans are to finance underdevelopment, not development. They’ve been to finance economic dependency, not economic self-reliance. They have imposed on the Global South a trade pattern that has led their balance of payments into increasing deficits. And the IMF has only lent money on the condition that they privatize and sell off their basic infrastructure, their raw materials, and other things.

So the United States is trying to say, well, if we write down our debt to the foreign dollarized debt, to foreign governments and the IMF and the World Bank that are basically arms of the U.S. economic strategy, then China has to write down its debt.

Well, the difference, as you point out, Mick, and this is what I think China needs to make very explicit that it has not done so far, is that its debt has been to help countries grow, not to finance their dependency, more or less. And China’s idea of mutual gain means, yes, we’re going to help you develop your ports so that you can grow, and your growth will provide your ability to have the money to pay for the loans that we’ve made out of your growth, not using the debt as a means of, oh, you can’t pay. Please sell off your ports, your raw materials, your land, your public utilities, and ultimately your government.

What we’re talking about with the chart is the whole difference between the Eurasian BRICS-plus strategy of international trade and investment and the predatory neoliberal U.S.-NATO strategy of the World Bank, IMF, and the U.S. government.

RADHIKA DESAI: Absolutely. You know, first of all, let me say that, “Confessions of an Economic Hitman” is a relatively more recent book.

But Cheryl Payer, back in the 1970s, already, maybe early 1980s, had already written a book called “The Debt Trap”. And the debt trap she was referring to was the one set by the West, not by China.

So these accusations of what China, about what China is doing are really absurd. And in fact, Michael, as you were talking, I was reminded that in a recent essay that I wrote, I cited the following study by one Asad Izmi, who noted in 2004 that Africa’s external debt has increased by more than 500 percent since 1980 to $333 billion and transferred $229 billion in debt payments from sub-Saharan Africa to the West since 1980, four times the region’s 1980 debt.

In the past decade alone, African countries have paid their debt three times over, yet they are three times as indebted as 10 years ago. So talk about debt trap diplomacy. This is what the West is doing to the poorest countries in the world.

He’s talking only about Africa. He’s not even talking about debt elsewhere, which has also, I mean, essentially what we have witnessed in the 1980s and 1990s are giant, so-called giant reverse capital flows. And the reason they’re called reverse capital flows is, of course, that the neoliberal ideology is that, free capital markets are going to direct capital from where it is in excess in the first world countries to where it is needed. But in fact, money and capital are moving from those parts of the world where they are needed to those parts of the world where they are already in surfeit. So that’s one point I wanted to make.

The second point I wanted to make is that, this current phase, it was actually an Indian academic who really is part of India’s aggression towards China that started using the term debt trap diplomacy vis-a-vis China. A guy called Brahma Chalani, who is one of the anti-China hawks in India.

And finally, I just want to say that the discourse of the accusations of debt trap diplomacy are actually part of a complex footwork on the part of the West, because as you showed in your chart, in fact, let me just go back to that. The chart that we were discussing, what you can see here is that bulk of the debt in this right hand side chart here, bulk of the debt that you are looking at is actually owed to not to China, but to the rest of the world, of which, of course, the Western countries are the leading creditors. And Western private lenders are also among the leading producers, lenders, because what has happened in the recent past is that Western financial institutions, essentially given the stagnant character of their own economies, have been looking for returns elsewhere. And one of the ways in which they have been getting these returns is by charging exorbitant interest rates to third world countries to lend to them to buy their bonds, essentially, which are issued in dollars or other international currencies.

So third world countries are in debt distress. As Michael pointed out, we are close to a 1982 type position. This is going to require complex negotiations. But these negotiations, unlike back in the 1980s, will now involve an outsider, namely China. China’s debt rescheduling practices are actually tremendously liberal. China has gone to the table and given both debt forgiveness and generous reschedulings and so on, without the kind of extortion that we are just looking at. But the West does not want to do that. And what better way of dealing with this issue of having to include China in their negotiations and China’s very different lending practices than to accuse China of what they are doing all along. So that is really the real story.

So that is about debt trap diplomacy. And any other, I think we should probably wind down because we are definitely over an hour by now. So any final comments on any aspect of this, but particularly China’s foreign economic policy?

MICK DUNFORD: No, I just think that what you just said, Radhika, is extremely powerful. But I think if you combine it with an analysis of the data, then it is quite clear that these claims about debt trap are in a sense trying to distract attention from the real source of the issue and to some extent stand in the way of a solution.

RADHIKA DESAI: Yes, and also because this time around the private sector is very heavily involved. And they are basically trying to, instead of dealing with the fact that the private sector has been lending irresponsibly and in a predatory fashion, they’d rather talk about China. This is basically it.

MICK DUNFORD: Yes, I think, they’re trying to put moral pressure on China, because if they can put moral pressure on China to get China to basically deal with the debt problems of these countries in order to reschedule their debt and so on, it enables them to be repaid in full. I mean, this is a classic example, of this kind of win-lose view of the world that predominates in the Western world.

RADHIKA DESAI: On that note, I think we should probably wind this discussion to a close. So please, we have just been talking about, we’re just completing the second part of a two-part series on China’s future, China’s economic future, whether it is going to decline, as the Western world and Western pundits love to say, or whether it is in the process of engineering the next industrial revolution.

So please watch both episodes, please share widely. And thanks again to Mick and to all of you for listening. And I look forward to seeing you again in a fortnight or so. Bye-bye.

MICK DUNFORD: Bye. Thank you, Radhika. Thank you, Michael.

Source: https://geopoliticaleconomy.com/2024/03/28/china-economy-western-media-myths/