The People's Republic of China: A Country In a Hurry
Earlier in the summer the China-United States Exchange Foundation invited me, along with three other economics writers, on a tour of China. It occurred over 11 days, and the trip included cities Beijing, Urumqi and Kashgar in the westernmost region of the country, followed by Shanghai.
The purpose of these visits funded by the Foundation was to gain a better understanding of China's promise, along with the myriad challenges that the country faces on the way to achieving developed status. Certainly China is misunderstood, and all it takes to see this is to read the coverage of it in U.S. publications.
We are told that the country is full of low income workers set to take the jobs of more highly paid Americans. Yet this description is often paired with the suggestion that China is already so rich that its government is single-handedly funding the U.S. government's nosebleed deficits. China is also characterized as a "currency manipulator" for its currency's peg to the dollar keeping the yuan artificially weak despite China effectively handing off its currency policy to the U.S. Treasury.
Most frightful from a trade perspective is the media-encouraged assumption that China is essentially "eating our lunch" on the way to great wealth for the rising Asian nation in concert with looming penury for a once glorious United States. A popular narrative today is that the U.S. must figure out a way to "out-innovate" China or else we face a gradual decline as an economic power.
In truth, China remains a very poor country, albeit one full of hard working individuals eager to enjoy the fruits of capitalism. This is not something we should fear. Underlying China's rise as a country is the entrance of hundreds of millions of new workers into the global workforce. This can only accrue to U.S. economic growth, which means the answer is not to cast a skeptical eye on China's hopeful rise, but to embrace it.
A country in a hurry. The first thing that jumps out to the casual foreign observer anywhere in China is that the Chinese are always moving. This is equally true in the gleaming, skyscraper metropolis that Shanghai has become and the impoverished, tenement-filled city that Urumqi remains.
This is understandable when we consider that China is not much more than thirty years removed from the shackles of communism. No matter where one looks, cranes dot the landscape as the Chinese seek to emerge from their impoverished past.
Though Shanghai presently resembles a world class city with a skyline to match, even there the work doesn't stop. Buildings continue to go up, as do houses and apartments to fulfill insatiable demand from existing and potential residents eager to live and work in China's most advanced city.
So while a shimmering Shanghai seemingly grows more resplendent by the day, the highly unattractive western city of Urumqi is full of individuals working tirelessly to make what is bland and unappealing glimmer. Saturdays and Sundays are said to be off days for China's citizenry, but a cab ride through any of its cities reveals a good number of its citizens working feverishly on weekends too; ever striving to make the depressed structure look grand, and the grand even more impressive.
That the market value of China's GDP is now second only to that of the U.S. has perhaps created the perception in the States that it's a rich nation. Nothing could be further from the truth. China's per capita income is actually quite small; its nominally high GDP a function of a lot of citizens earning wages that in the U.S. would statistically make them quite poor.
With China's supposed wealth in mind, a Ministry of Commerce official was asked whether the Chinese government would countenance a U.S. debt default; or delay in payment on Treasury debt of which China presently owns 7%. The question was answered in a grave tone, that Chinese officials would not smile on such a scenario. As the official put it, China remains a very poor country, and the earnings on Treasury debt are much needed.
When asked by me about the continued "stealth" default of U.S. debt through continued dollar devaluation, the answer was that Chinese officials are not happy with the dollar's direction. They're fully aware of the nuanced truth that the U.S. has already defaulted on its debt obligations; albeit keeping current on interest payments with cheapened dollars. No one is fooled.
Is China's rise our decline? The answer to this question, at least empirically, is no. If we date China's move toward capitalism to the late 1970s, it should then be pointed out that while the U.S. labor force participation rate in 1970 was 60%, by 2005 it was 66%. Put simply, whatever jobs U.S. firms have moved to China in search of lower wages have been replaced.
Even better is the kind of work that's replaced that which has migrated overseas. As economists Bruce C. Greenwald and Judd Kahn have found, since the 1970s, managerial and professional employment have been the fastest growing U.S. job categories. Looked at in light of China's rise as an economic power, the jobs that moved to China occurred in concert with enhanced work opportunities for the average American.
Where it gets interesting here is what was said in meetings with Ministry of Commerce officials in China, along with think tank scholars. Though some in the U.S. commentariat bemoan the loss of manufacturing/factory type jobs to China and other developing countries, the view on the ground among Chinese officials is that its citizens are more than eager to shed the factory jobs that have moved to their country.
More specifically, the Chinese don't exactly fancy the work of which Americans lament the loss. In the Federalist Papers, founding father Alexander Hamilton warned against Americans falling for the "deceitful dream of a golden age", and it seems Americans have done just that in promoting the view that the loss of factory-style jobs to China is a loss of a once grand period in American economic history. Instead, it should be said that the offshoring of low-value work has and will continue to speak to our positive economic evolution; one that the Chinese want to emulate as evidenced by the desire of its citizens to move out of the factory. As opposed to an economic threat authoring our economic decline, China's rush to growth has coincided with enhanced work opportunities stateside.
This was entirely predictable. Indeed, as Ludwig von Mises observed in Liberalism, "for the liberal, the world does not end at the borders of the state." Looked at in theory, the expansion of global economic cooperation that increasingly includes the workers of China means that individuals throughout the global economy can increasingly seek the work that most complements their skills.
In practice, this means that Americans import shoes, socks and t-shirts made in China, and the "currency" they use to attain these low value items is earned at global innovators like Microsoft, Google and Intel. If our brilliant, life enhancing economic relationship with individuals in China didn't already exist, we'd have to invent it.
Must China rebalance its economy? A frequent question raised by the other journalists on the trip concerned the supposed distorted shape of China's economy, and the presumption that China must "rebalance" it, or reorient it toward consumption. The thinking there was that the Chinese employ an "export strategy," and the government must encourage imports to balance exports.
It was on this subject that the greatest conflict occurred; conflict made worse by the fact that many Chinese officials and think tank scholars seemed to agree with the other American journalists. Perhaps they were being polite, but they even agreed with one suggestion that the U.S. financial crisis was to some degree a function of China's economic imbalance; one that led to an excess of capital flows into the United States.
About this, it should first be said that there's no such thing as an "export strategy." Or put more simply, to export is by definition to import.
To see why, it has to be remembered that the exporter receives money in exchange for whatever is sold or exported, and unless that individual hides the money under a mattress, it is spent on goods of equal value. If the exporter saves the money, the exporter is merely shifting his consumptive ability to another individual.
Exporting is importing, thus rendering absurd the notion that China, or any country for that matter, practices an export strategy. It should also be said that countries don't export or import; rather individuals do both.
Considering China on its own, for any visitor there to suggest that the country practices an "export" strategy with no eye on consumption is willful blindness. As evidenced by the constant development of apartments and houses, high end retail shops, and restaurants, the Chinese are great consumers. Their growing consumptive ability will doubtless accrue to American producers.
Certainly the dollar amount of trade between the Chinese and Americans continues to grow, thus putting to bed the lie that trade between the two countries is one-sided. Trade between individuals in the U.S. and China is hardly coerced, and since it isn't, it's apparent that the flow of goods and investment between the two countries is wealth enhancing for both sides, as trade must generally be for it to continue.
What's apparent at least for now is that quite unlike the Japanese who've historically created world renowned brands along the lines of Toyota, Honda and Sony, the Chinese are more content at least for now in their role as manufacturer of the innovations of others. Despite 11 days in the country spent meeting with government and business officials, never was a Chinese brand mentioned that this observer had heard of. Logic says this will change in time, and if so, it's something to look forward to.
As for the suggestion that China's export strategy caused the financial crisis, not asked enough is how the Chinese sending Americans what they want could have caused a financial meltdown stateside. It would be hard to make the latter correlation under any reasonable scenario, and it should simply be said that financial crises of the kind we experienced in 2008 always and everywhere have the fingerprints of government on them, not producers acting in productive ways.
State directed investment in China. Here it was tough to develop a sense of how much investment is driven by government, and for that matter how much of bank lending within the country is a function of government control.
Whatever the numerical amount, this might give one pause as to China's future growth prospects. To state the obvious, the problem with government-directed investment is that it's almost certainly wasteful for profit and loss not playing its crucial role.
All that said, as evidenced by the manufacturing and retail presence of seemingly every important global brand in China, it's apparent that simple market forces have had a lot to do with China's impressive growth. The actions of non-Chinese companies certainly are governed by profit and loss discipline, and they wouldn't be there unless the economic activity in the country had staying power.
The only conclusion about state-directed investment that seems realistic is that the Chinese thrive despite governmental distortions, and will continue to do so. Still, the country's rise from desperate poverty begs the question of how much more rapid it would have been absent a meddling, capital allocating government.
As an aside, the government there seems intent on developing wind farms, clean energy, and other sources of energy that we call "green" in the United States. On more than one occasion we were told that the U.S. is not doing enough to develop its own alternative energy sources.
The contrarian response to the above is that we don't need to. Indeed, assuming the threat of global warming or man-made climate change is real, U.S. interests can happily import Chinese innovations if the threat presumed by some proves true. And if not, Americans will be that much better off for not having wasted precious human and financial capital on something ultimately deemed nonessential by the marketplace.
Conclusion. When we stop to consider where China began a little over 30 years ago in its march to developed status, its rise is nothing short of amazing. Capitalism, or the profit motive, though not pure in China, has been proven yet again as the greatest anti-poverty program ever conceived.
Still, China has a long way to go, and this isn't always apparent to those who've not visited the country. Perhaps blinded by GDP figures that point to a country economy that is the world's second largest, many forget that on a per capita basis most of China is very poor. This reality is very apparent to anyone lucky enough to visit.
Going forward, we must hope China's stupendous rise from the desperation that was communism continues with great speed. We should because the growth of the world's labor force signals greater work specialization, and with greater specialization, better and cheaper goods in abundance made available to us in return for our own, increasingly specialized work efforts.
China's rise isn't a threat to the United States, rather it's an opportunity to divide up work on the way to a world of plenty. In short, China's economic success is ours, and ours is China's.