Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands. Cults everywhere: Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...
Tempus Fugit Memento Mori - Time Flies Remember Death
Throughout the modern period nary a day has gone by without some populist politician, axe-grinding union worker, or delusional Marxist, in a developed country blaming economic, social and job dislocations on the evil foreigner. Yesterday Hong Kong, South Korea, Japan were going to destroy us through unfair trade and the superiority of their centralized ‘managed trade’ regime. Today it is China. The message is old, repetitive and wrong.
The mantra has not changed much in recent years. The end of Western civilization first attributed to Japan Inc. then to the Asian tigers, is of course now assigned to China. Today it is the unyielding Communist state who is stealing jobs, wiping out our industry, and annihilating our caring unionized workers, on an uninterrupted path to world domination, proving yet again the superiority of centralized Asian ‘values’. In this light, we must raise trade barriers, manage a currency realignment, enforce eco-marxist and labor standard regulations on the Chinese, and call them names. What nonsense.
A couple of commonsensical views first. China will not supplant the West in the next century. It is still poor and backwards. About half the population lives in crushing poverty. It is obvious that China will experience massive dislocations as the coast-periphery, steaming ahead on selective market liberalization, comes into conflict with the poorer core-hinterland. There can be no pronounced and durable economic change and industrial development without a plural, constitutional and transparent democratic political process. History has taught this innumerable times.
The burgeoning middle and upper classes in China will either initiate widespread reforms that benefit all Chinese or the state itself, along with the Communist party will fracture and disappear. It is more likely that China will experience a 1991 Russian-style moment, than a striding, smiling, united, purposeful and unstoppable rise to global hegemony. The case for an uninterrupted path to Chinese global over-lordship is not based on current evidence or historical understanding. It is nothing more than populist hysteria and cheap nationalism.
So much for that.
A few economic points need to be made. Yes China is growing at 10% per annum, but the base is still low. Its economy is roughly 1/3 the size of the US’ which means a per capita GDP of about $5000. This is no better than Russia’s. Chinese economic growth is based on huge levels of FDI [foreign direct investment] of some $20 billion per annum. Over 50% of Chinese export trade is intra-Western. Western firms are using China to supply their own depots, warehouses or distribution systems with product. In other words it is Western capital and technology which is transforming China, not native Chinese ‘superiority’. If the Chinese cannot steal or ‘borrow’ Western intellectual property, assets and business processes they will never be able to compete. In this regard our governments have a legitimate claim on China, to demand an end to IP theft and other forms of piracy.
But it bears repeating that outside of legitimate trade concerns [IP theft, Chinese state owned firms competing unfairly, profit theft by the Chinese government from Western firms in China etc.], it is Western firms, workers, consumers and markets which are benefiting from Chinese economic growth. Accessing a rising Chinese middle class, building cheaper, new or improved product supply, enacting business process improvements premised on the offshore model, and fomenting innovation by increasing domestic and international competition -all of these factors and more help Western firms and consumers. We are simply a lot richer since China began to industrialise. Bringing China into the orbit of world trade flows is a benefit to everyone and has helped lift 350 million Chinese out of poverty. It is hard to make any rational argument - either domestically or internationally - against closing off the Chinese to continued international trade and investment exposure.
Chinese economic growth and potential whilst benefiting Western firms who supply technology, equipment, minerals and finance to China, does not mean that China will inevitably take over the planet. Such facile thinking should be easily rejected. China, for all its recent progress, suffers from some serious economic and political flaws.
First, China’s productivity rate while higher than Europe’s is far lower than the US, meaning that US workers are readily able to compete on higher value-added product production with the Chinese. There is no evidence that US manufacturing which is about 30% of GDP output, higher than 15 years ago, is dying. Second, as economies mature from light industry, or simple manufacture of cheaper product, productivity, innovation and adaptable business processes become the best guarantors of success in achieving profits and market dominance. The Chinese have a long way to go to match US or even European skills in this regard.
Third, capital liquidity which is so vital for investments is not so deep in China. The Chinese stock bubble which will burst between now and the time of the next Olympics, along with its unstable banking and credit industry, is a marked disadvantage to long term Chinese economic growth. Lastly, the social-political problems from industrialization which the US and Europe solved over 2 centuries, are now only beginning to make themselves felt in China. Expect turmoil in China, not unified peace.
In light of the above it is very curious, though unsurprising, that US, Canadian and EU politicians are calling for various economic attacks on China. Populist nationalism using hysteria over impending economic ruin, when mixed in with xenophobia, is an easy political winner. Remember NAFTA circa 1995 ? Apparently Mexico was going to subsume the US and Canadian economies. In the past 5 years the US economy has grown by 30% and is the wealthiest it has ever been in its history as measured by GDP per capita and net assets per capita and it is at full employment. Is China to blame for full US employment? Or Mexico for that matter?
Calls for ‘action now!’ against China are absurd. The only exception to this is demanding that the Chinese revaluate their currency. They should since it is their own best interests but they are constrained. Before a currency can be ‘floated’ on the markets governments need to lift capital controls [on money flowing in and out], and have a stable banking and finance system. China has capital controls which means that market based supply and demand of capital moving in or out of the system, does not yet exist, and China’s banking system is not in good shape.
Some experts feel that roughly 1/3 or more of Chinese bank loans to Chinese state owned companies might be bad. This would presage a huge banking meltdown in China. Under a floating exchange rate this would ensure a massive devaluation of the Chinese Yuan and a financial crisis of the first order. The Chinese need to take steps to reform their banking system and get rid of capital controls first, before floating their currency.
By floating their currency the Chinese would accomplish a lot. Interest rates would rise in China [higher rates attract capital] and would help end the Chinese stock market speculative bubble. Since real bank rates are negative in China, people pour savings into the stock market. It is only a matter of time before the bubble bursts. With rising interest rates, GDP growth would then move towards domestic services and consumption and help contain the raging growth in industrial development since capital would contract and domestic purchase power [stronger currency] would rise. This would alleviate some social problems as well. Trade balance deficits would like-wise contract, assuaging US-Chinese trade tensions.
Historically poorer countries have had lower exchange rates. As an economy matures, and productivity picks up the exchange rate will rise. Flexible exchange rates can work when natural market conditions are present. In such a case the exchange rate becomes a sort of currency ‘price’ reflecting economic and trade conditions and the ‘value’ of that currency internationally. China is not ready for such market pricing yet but the US is right to focus on it. Other politicians with their silly demands for trade protectionism; non-tariff barriers; quotas and gratuitous China-bashing, need to be ignored.
There never was an era of ‘good old days’ of monopolies, government coercion and limited consumer choice! Such policies result in high priced products, limited innovation, and unmitigated third world poverty as the evils of capital markets and trade, politely ignore most of mankind. China is getting richer, and this is good.
It is not however going to dominate the world, nor as with South Korea or Japan in times past, will Chinese economic prowess, based entirely on Western concepts, wipe out our economies. China does however need some prodding to enact important economic and monetary reforms which will benefit its own development and that of the world at large. Cheap nationalism and xenophobia are unhelpful in dealing with the Communist state.
