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Is the Chinese Economy Really in Trouble?

Here Are the Lessons of History the Press Ignores

By Eamonn Fingleton • Unz Review • January 11, 2016

“You cannot hope to bribe or twist – thank God! – the British journalist. But, seeing what the man will do unbribed, there’s no occasion to.”

So wrote the witty early twentieth century British man of letters Humbert Wolfe. His assessment of American journalists isn’t recorded but, where pivotal issues are concerned, they have probably proved even more naïve lately than their British counterparts.

American journalistic naïveté has rarely been more embarrassingly on display than in recent coverage of the Chinese economy.

Here is probably the most successful export economy in world history, yet American journalists have somehow been persuaded that it is in such terrible shape that it needs a devaluation. CNBC, for instance, reported the other day that “most experts” believe the yuan is overvalued by fully 10 percent. This despite the fact that the Chinese currency has already dropped more than 8 percent against the U.S. dollar in the last two years.

True China’s export performance has been lackluster lately – exports were down 3.7 percent in yuan in November, for instance, and the drop was considerably greater in dollars. What is rarely mentioned, however, is that China’s exports are one of the most volatile series in global economics. Short-term setbacks of as much as 20 percent or more are common and bespeak remarkably little about China’s underlying economic health. What matters is the long-term trend, a rate of growth in dollar-denominated export revenues that has averaged more than 17 percent a year in the last fifteen years. That is a truly sensational number and its accuracy is attested by other nations’ imports.

It hardly needs to be said that, pace what the press’s “expert” sources say, the case for devaluation does not stand up to even cursory examination. After all, the point of exchange rates is to ensure that trade is conducted on fair and mutually advantageous terms. Yet for a generation now the yuan has been so undervalued that it has wreaked havoc on what little has remained of America’s once superlative industrial base.

The result as of 2014 was that America’s bilateral trade deficit with China totalled $348 billion. This accounted for the vast bulk of the entire U.S. current account deficit with the world as a whole, which totalled $389 billion (the current account is the widest and most meaningful measure of a nation’s trade). Meanwhile China enjoyed a current account surplus of $220 billion.

Even in the face of figures like this, the press has often put a distinctly negative spin on Chinese economic news. Indeed many journalists have gone so far as to entertain suggestions – emanating ultimately from Sinology’s lunatic fringe – that the Chinese economic miracle is just smoke and mirrors and that in reality China is teetering on the brink of economic or political disaster, or both.

The political consequences are hard to exaggerate. Reports of economic trouble in China not only pander to wishful thinking among ordinary Americans but provide U.S. policymakers with an excuse to procrastinate on long-overdue measures to crack down on China’s trade cheating. Meanwhile the ground is cut from under economic hawks like Donald Trump who want to get tough with China.

In the circumstances the Beijing authorities could hardly be better served and it seems clear that for many years they have been quietly promoting a “bad news” propaganda agenda. (Japan does so as well, but that is a story for another day.)

The root of the press’s problem is a poor choice of sources. Instead of proactively seeking out trustworthy, independent sources, journalists too often sit around passively heeding whomsoever happens to be within earshot. Far too often this means listening to sources artfully placed in prominent positions by the China lobby.

What is clear is that many of the top academic Sinologists seem to be congenitally pro-Beijing. Others are merely ambitious, and know that to land a big job in a future presidential administration, they have to avoid saying things that might discomfit the China lobby. That lobby is largely funded by major U.S. corporations that do much of their manufacturing in China. One of the lobby’s most obvious objectives has been to keep the yuan low, with all that has implied for the future of America’s manufacturing base. As the lobby controls large tranches of China-studies money, it has had little difficulty ensuring that America’s most frequently quoted Sinologists are on message.

As for other key sources, China-watching securities analysts and bank economists are generally even less reliable than university-based Sinologists. They are clearly constrained by a need to please their most profitable and demanding customers, among whom various financial arms of the Chinese system have long taken pride of place. (China is now a vast exporter of capital, which is, of course, great news for those Wall Street firms who find favor in Beijing.)

Of course, some frequently quoted sources undoubtedly do believe what they are saying. In particular there is a minority of far-right China-watchers who love to preach textbook American laissez-faire to an apparently benighted Beijing. This is the “Tea Party” wing of American Sinology. Its members seem to be particularly lacking in the listening skills that are essential to understanding a place like China (basically you have to listen to the unsaid – something that Tea Party types probably consider an oxymoron). Of course, precisely because such Sinologists are so often wrong, they are viewed in Beijing as useful idiots who work wonders in keeping Americans confused and disunited.

While we can rarely say for sure whether any particular China watcher is in Beijing’s pocket, most undoubtedly are. Though they would be horrified to be so identified, their agenda is pretty obvious in the way they censor themselves. Instead of speaking out on China’s trade barriers, intellectual property theft, and the undervalued yuan, they typically tiptoe away from frank discussions of such matters.

Let’s take a closer look at some of Sinology’s more problematic figures. It takes no more than a cursory internet search to turn up countless China watchers who have vainly predicted the Middle Kingdom’s eclipse, if not collapse, over the years. In a moment we’ll look at Gordon Chang, who ranks as the king of the “collapsing China” crowd, but first let’s consider a few pretenders to the throne.

One often quoted source is the Beijing-based professor and analyst Michael Pettis. Though the tenor of Pettis’s comments varies, he has often come across as a super-bear.

Here, for instance, is how he described the Chinese economy to the Associated Press in 2007: “Right now, we’re in a sweet spot. Everything is as good as it can get…. You can make a very plausible case that we have all the conditions for a serious crisis when there’s an adverse shock. There’s a lot more debt out there than we think.”

Any U.S. policymaker who was persuaded by this would have been blindsided by subsequent events. China’s exports, for instance, multiplied more than three-fold in dollar terms in the next seven years.

Among China super-bears, few are more outspoken than Arthur Waldron, a professor at the University of Pennsylvania and a member of the Council on Foreign Relations. As far back as 2002, he claimed that Chinese economic growth was make-believe. Writing in the Washington Post, he backed a madcap theory that instead of growing at about 6 percent, as officially stated, the Chinese economy had actually been contracting for the previous four years. He concluded that China’s industrial policy was “a recipe not for growth but for economic collapse.”

Another Sinologist who has played an outsize role in confusing American opinion is Susan Shirk. As the Ho Miu Lam Professor of China and Pacific Relations at the University of California, San Diego, Shirk remains what she has long been: a notable “friend of China.” An early indication of her style came in 1994 when she published How China Opened Its Door: The Political Success of the PRC’s Foreign Trade and Investment Reform. She went on as Deputy Assistant Secretary of State in the Clinton administration to play a key role in negotiations that led to China receiving Most Favored Nation trade status.

Her claim to fame as a China super-bear is based largely on her 2007 book, China: Fragile Superpower: How China’s Internal Politics Could Derail Its Peaceful Rise. The book postulated a supposedly serious risk that the Chinese regime would be overthrown in a popular revolution. The consequences, she suggested, could be devastating not only for China but for the West. She urged the West not only to accord Chinese leaders exaggerated respect but to adopt an explicit policy of keeping them in power. Among other measures that presumably meant holding back on complaints about China’s trade policies.

Virtually every aspect of her analysis can be debunked but a full rebuttal would require more space than I have here. The first thing to note is that she claimed her analysis was based on conversations with numerous top Chinese leaders. That may well be so – but she evidently didn’t ask herself what was in it for them. After all they have made a fine art of keeping things secret from their own people. Why would they pour their hearts out to a mere gweilo (and a gormless one, by the sound of it)?

For now let’s simply note that for millenia, Chinese leaders have generally shown themselves uncommonly adept at nipping in the bud any signs of incipient revolution. Supreme leader Deng Xiaoping perpetuated the tradition by so brutally breaking up the Tiananmen protests in 1989. Today’s leaders moreover seem more secure than their predecessors in that they are equipped with modern methods of electronic surveillance that can provide a much earlier warning of incipient trouble than in the past.

Now let’s consider David Shambaugh, a political scientist at George Washington University. Long noted for suggestions that the People’s Liberation Army is a paper tiger, he has become outspokenly pessimistic about China’s political system in recent years. One recent essay, published in the National Interest in 2014, was headed “The Illusion of Chinese Power.”

Then in March 2015 he persuaded the editors of the Wall Street Journal to publish a commentary headed “The Coming Chinese Crackup.”

He wrote: “The endgame of Chinese communist rule has now begun, I believe, and it has progressed further than many think.” Referring to Communist Party rule, he added: “Its demise is likely to be protracted, messy and violent. I wouldn’t rule out the possibility that Mr. Xi will be deposed in a power struggle or coup d’état.”

His analysis was so melodramatically worded that it attracted considerable criticism, not least a point-by-point rebuttal from Forbes.com commentator Stephen Harner (who, unlike Shambaugh, can claim to have spent much of his career in China).

Shambaugh’s central point was a surmise that Chinese president Xi Jinping’s efforts to curb corruption had dangerously ruffled the feathers of power rivals.

As a measure of Xi’s allegedly weakening grip, Shambaugh mentioned that on a recent visit to a Chinese campus bookstore, he noticed that a pile of pamphlets by Xi didn’t seem to be moving. This, of course, is broadly as fatuous as an illiterate Chinese visitor judging Hillary Clinton’s presidential prospects from the height of a pile of pamphlets at Columbia University.

Shambaugh also noted that an increasing number of Chinese students have been studying abroad lately. This, he suggested, stemmed mainly from a morbid fear of political instability at home. He did not seem to wonder whether less sensational explanations might suffice. After all, on the latest figures, Koreans are proportionately nearly seven times more likely than the Chinese to study in the United States – and the Taiwanese are more than four times more likely. Are we to believe that the danger of “crackup” is even greater in South Korea and Taiwan than in China? The truth is that East Asian students study abroad for a variety of rather mundane reasons, most notably the chance to improve their English. The trend has been powerfully stimulated not only by East Asia’s increasing wealth but by the same advances in air travel and communications that have been generally promoting globalization.

Perhaps Shambaugh’s most important point was that many super-rich Chinese families have been buying homes overseas. But, as Stephen Harner pointed out, this is hardly news. The Chinese have been doing  so for generations. The only difference these days is that they have so much more money to spend. This, of course, attracts notice and even gets written about in the press.

Probably the single most widely publicized member of the “collapsing China” club is Gordon Chang, a Chinese-American lawyer. Since he published The Coming Collapse of China in 2001, he hasn’t had a good word to say about China’s prospects. Yet between 2001 and 2014, China boosted its exports from $267 billion to $2,331 billion – a more than eight-fold rise and a compound annual growth rate of an almost unbelievable 18.1 percent. This signified a rate of sustained productivity growth that few, if any, other nations have ever matched.

Contacted recently, Chang professed to be still a convinced China super-bear. But if China managed to escape economic Armageddon in the wake of his book’s publication fourteen years ago, what’s different today? In its latest reformulation, Chang’s argument is that China is facing devastating new competition from India. Just as a rising China wreaked havoc on the U.S. economy, a rising India supposedly poses a similar threat to the Chinese economy.

To a non-economist, especially one who is not familiar with Asia, this might not seem entirely implausible. In reality Chang’s argument is based on one of the most elementary fallacies in economics, the idea that success is a zero-sum game. His implicit assumption is that for some nations to win, others necessarily have to lose. This is Malthusianism and it overlooks the fact that in normal modern conditions economic growth is an expanding universe. Think, for instance, of the rise of Scandinavia. Though Norway, Sweden and Denmark now rank near or at the top of the world income league, this has hardly on balance posed a problem for a nation like Germany.

What Chang seems to be implying is that India will be accorded carte blanche to use the same super-aggressive methods on the Chinese industrial base that China has used on the American industrial base. He fails to note, however, that Washington has been asleep at the switch, with the result that China has been allowed to get away with the economic equivalent of murder. In particular China has extorted a cornucopia of advanced production technologies from America. U.S. corporations have been told that to sell their products in China they must manufacture there and bring their best technologies. To say the least, such diktats ride roughshod over China’s obligations under international trade agreements. India is unlikely to be permitted to use similar extortion techniques against China.

In truth about the only thing India and China have in common is an Asian address. In economic and political fundamentals, they are chalk and cheese. In trade, for instance, India remains a negligible force, despite many years of bullish econobabble in the West. At last count it was not only being out-exported nine to one by China but China seemed to be lengthening its lead. (Measured since 2006, India’s exports have hardly doubled, whereas China’s have more than quadrupled.)

Crucially the Indian savings rate runs little more than half of China’s. Worse, the Indian authorities seem to lack the authoritarian tools necessary to boost it. (In In the Jaws of the Dragon, a book I published in 2008, I showed how China uses authoritarian controls to suppress consumption, thereby automatically and powerfully boosting the savings rate.)

Another key distinction is that whereas China has run huge current account surpluses for decades, the Indian balance of payments remains stubbornly in the red.

A second strand in Chang’s argument is that capital flight threatens to destroy the Chinese economy. Though this again may impress a non-economist, there is again a lot less here than meets the eye. For a start, China is necessarily a huge capital exporter as a result of its current account surpluses (as a matter of simple arithmetic, every dollar of surplus represents a dollar of capital that will willy-nilly be exported).

To be sure Chinese leaders have often talked as if they are worried about capital flight. The point of such talk, however, would appear to be merely to deflect attention from the People’s Bank of China’s market interventions to keep the yuan undervalued.

What is clear is that if the Beijing authorities can control the internet and the press, a fortiori they can control capital flight (which requires mainly just a firm grip on a mere handful of major banks, most of which are, in China’s case, state-owned). What we know for sure is that historically other nations with a far more liberal tradition – the United Kingdom in the mid-twentieth century, for instance – have had little trouble maintaining effective capital controls. Moreover the investment case for the British getting their money out in those days was far greater than for the Chinese today. After all Britain’s economic performance was persistently anemic, whereas China’s current growth rate, at around 6 percent, remains one of the world’s highest. In the unlikely event that Chinese capital flight really becomes a problem, the authorities have a host of remedies available, not least an Orwellian system of electronic snooping far more intrusive than anything known in the West today, let alone in the United Kingdom of the 1960s.

So what are we left with? It is past time the American press remembered its traditional commitment to balance – and recovered its commonsense. Hearteningly, not all members of the press are incapable of learning from experience.

I will leave the last word to Gideon Rachman of the Financial Times. He cut to the core of the matter in a well-balanced commentary in 2012.

He wrote:

It is clearly true that China has enormous political and economic challenges ahead. Yet future instability is highly unlikely to derail the rise of China. Whatever the wishful thinking of some in the west, we are not suddenly going to wake up and discover that the Chinese miracle was, in fact, a mirage.

“My own scepticism about China is tempered by the knowledge that analysts in the west have been predicting the end of the Chinese boom almost since it began. In the mid-1990s, as the Asia editor of The Economist, I was perpetually running stories about the inherent instability of China – whether it was dire predictions about the fragility of the banking system, or reports of savage infighting at the top of the Communist party. In 2003, I purchased a much-acclaimed book, Gordon Chang’s, The Coming Collapse of China – which predicted that the Chinese miracle had five years to run, at most. So now, when I read that China’s banks are near collapse, that the countryside is in a ferment of unrest, that the cities are on the brink of environmental disaster and that the middle-classes are in revolt, I am tempted to yawn and turn the page. I really have heard it all before.


Eamonn Fingleton reported on East Asian economics and finance from a base in Tokyo for 27 years. He met China’s supreme leader Deng Xiaoping in 1986 and predicted the Japanese stock market and real estate crashes in a major article in Euromoney in September 1987. He is the author of Unsustainable: How Economic Dogma Is Destroying American Prosperity (New York: Nation Books, 2003).

January 11, 2016 - Posted by | Economics, Malthusian Ideology, Phony Scarcity | , ,

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