You are in > International
International
Did China cause the crisis?
Though the former have much greater resources available to cushion them, both the high flying creators of abstruse financial 'products' - whose nature and function hardly anybody comprehended except that they seemed for several decades to be strikingly successful in their purpose of making money - and the workers who create the material goods and services whose uses are palpable, are being cast out equally as the system is wracked in crisis. With the same proviso, the debacle is felt deeply not only by the laid-off workers and homeless sub-prime mortgage victims in the United States of America but also by the redundant migrant labourers of the opposite pole of world capitalism, who are forced to abandon their temporary homes in Guangdong and the other export manufacturing zones in the People's Republic of China.
USA Today reported on 26th January:
Household names such as Caterpillar, (CAT) Home Depot (HD) and Sprint Nextel (S) said Monday that they are laying off a combined 35,000 workers in moves that stressed the severity of the worldwide recession and kicked off what is likely to be a week of gloomy earnings announcements, further job cuts and dismal data.
The layoffs continued Tuesday as Corning said it is cutting 3,500 jobs, or 13% of its payroll.
The news ratchets up the pressure on the Obama administration and Congress as lawmakers debate an $825 billion stimulus package intended to save or create millions of jobs. Far more job cuts are likely as consumer and business spending tumbles amid what many economists say is the worst recession the USA has seen since the Great Depression.
"Some of the worst job losses are ahead of us, not behind us," says Wells Fargo senior economist Scott Anderson.
He expects 3 million Americans to lose their jobs in 2009 — up from the 2.6 million who were cut last year, which was the most since 1945, the final year of World War II. The layoffs are happening in "all industries in all areas of the world," Anderson says. "This will be one of the worst job markets in the postwar period."
Among these areas of the world, one of the hardest hit is East Asia. The Economist magazine observed on 29th January:
In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.
Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the [1930s] Depression.
Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch.
As an article in Money Week on 31st January noted, one of the main reasons for the dreadful plight of the other Asian economies is that China has massively reduced its imports:
Parts of Asia that have relied on rapid Chinese growth are [...] suffering. Japanese exports to China were down 25% year-on-year compared with growth of 16% as recently as July. Taiwanese exports to the Middle Kingdom are down by an annual 40%. What's more, Chinese imports were down by an annual 21% in December, and the three-month moving average of US export growth to China has fallen below the zero line, pointing to slack domestic Chinese demand.
That huge reduction in imports suggests that China's economic problems may be far worse than the 2008 growth figure of 6.8% implies. According to the Money Week article:
Investors could be in for a shock in 2009, says Albert Edwards of Société Générale. The Chinese economy appears to be "imploding". Electric power output, which normally moves up and down with GDP growth, has been declining for the past three months, while the Chinese OECD leading indicator, which GDP growth has followed closely over the past decade, has plummeted, suggesting growth is set to collapse.
And the writer predicted:
With the export-dependent economy slowing fast, the [Chinese] government faces mounting social upheaval and protests could escalate to the point where the regime itself is under threat.
The number of workers in China who have already lost their jobs due to the crisis is conservatively estimated at twenty million.
Sorceror's apprentice
Evidently, it is no longer tenable to speak only or mainly of a financial crisis. Emerging from the banking collapse in the USA and subsequently in the rest of the West, is the collapse of industry worldwide, caused not merely by the inability of companies to obtain loans but by the inability of companies to sell their products; the latter caused by the inability of other companies and the individual consumers to obtain loans with which to buy the products, and, even worse, as the crisis enters its accelerating and self-propelling spiral, by companies becoming bankrupt and workers becoming redundant, therefore ceasing to have an income with which to buy products- thus the companies which had supplied those goods must lay off more workers and/or go bankrupt.
And underlying all of that- though the faint glimmers of an understanding of this have only just begun to emerge- is the fact that the firms, in competing to increase their market share and their profits, have been constantly striving to raise their productivity while cutting or holding down their costs. While common sense would suggest that such improvements in efficiency would be of unmitigated and long-term benefit to everybody, under the capitalist economic system- particularly the privatised, unplanned and lightly-regulated 'free market' version of the system which existed in the 19th and early 20th Centuries, and which then re-established itself and became globalised in the late 20th and early 21st Century- this seemingly beneficial process has some startlingly unwelcome results. Among those is the increasing gap, even in the good times, between rich and poor; another is the inevitability of catastophic economic crises.
Within the costs which the capitalist firms must always strive to reduce or keep down, the primary cost is wages; and if production is increased while the wages of the workers (who are the majority of the final consumers) are held down, how can the rising volume of goods be sold, thus allowing the global capitalist economy keep on expanding by means of the 'consumer boom'? In our recent period, this problem was temporarily solved by allowing and encouraging Western consumers to plunge themselves into an increasing amount of debt; and the banks and the mortgage houses were only too happy to supply the credit, deriving therefrom not only a handsome profit from the interest, but also providing the means by which the arcane and highy lucrative financial instruments of the 'shadow banking system' were constructed. But in the end, most of the consumers had only their wages with which to pay the interest on their debts; wages which were being held down. So, in the end, the enormous bubble had to burst.
The process, by which the very success of the individual firms which comprise the free-market capitalist economy eventually convulses the whole system in a desperate crisis, was described by the most intelligent and knowledgeable analyst of capitalism in the 19th Century. As Karl Marx wrote in 1848:
Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells [...] It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property.
Until the present debacle, the last of these gigantic economic catastrophes was the one which was sparked off by the New York stock exchange crash of 1929, the eventual consequences of which entailed not only unemployment rising to 25% and more in the industrialised capitalist countries, but also World War Two and the aggressive advance of the global movement to overthrow capitalism. The USSR broke out of its isolation, creating allied socialist states in Eastern Europe; and in 1949 China, a country whose population is bigger than that of the USA, Western Europe and Japan combined, fell to the Communist Party.
Very sensibly, though not without dissention- and with the help of the struggle of the left wing and the trade unions- the rich countries shrank the scope of the market, introduced nationalisation, strict regulation and a degree of economic planning, allowed a big increase in wages and social benefits, reduced the gap between the richest and the poorest, and restricted financial speculation. By these social-democratic measures, capitalism- though it was no longer capitalism as we knew it- survived, stabilised itself, saw off the threat that revolution would come to the West, and made itself strong enough to divide and defeat the global socialist forces arrayed against it.
In 1978, after several years of negotiations with the US government, the People's Republic of China began to reform its economic system in a capitalist direction, in return for the phased lifting of most of the US-imposed Cold War trade and investment sanctions.
Though of course there were many other factors involved, it was with that victory against communism achieved that the advanced capitalist countries, led by Reagan in the USA and Thatcher in Britain, proceeded to dismantle the social-democratic structures. Industries were privatised and de-regulated, trade unions were defeated, welfare benefits reduced, market competition revived; and finance was not merely liberated but proclaimed to be the fountain of wealth.
Thus capitalism as previous generations had known it was resurrected, upgraded with the added power of modern technology, and the era which became associated with the word 'globalisation' was initiated; its rampant international penetration assured by the downfall of socialism in Eastern Europe and the USSR after 1989.
Snafu
In the countries whose political authorities are usually referred to in the Western press as democratic governments rather than as regimes, one of the means by which it is ensured that social upheaval and protests do not escalate to the point where the social system itself is under threat is the alternation in office through pluralist elections, between parties which, however genuine or otherwise are their differences, can be relied on to maintain the existing structure of society. Among the recent beneficiaries of this arrangement is Mr Timothy F Geithner, President Barack Obama's new Treasury Secretary.
While it is much too early to tell what precise effect this will have in practice, the statements of the incoming US administration are staying true to the approach of 'change' on international policy which was espoused by the Obama camp during the presidential election campaign: less forces here, more forces there; a softer line on this, a tougher line on that. Possibly Cuba may draw a slight but significant benefit from these changes; but China, if we are to take seriously the statement from Timothy Geithner on the eve of his confirmation as Treasury Secretary, is targeted for economic confrontation. In its 24th January issue, the Economist commented on the salvo fired against China by Mr Geithner in his statement to the US Senate Finance Committee:
Technically, he is not yet treasury secretary, but Tim Geithner has already made waves in financial markets. In a written response to questions from senators debating his confirmation, Mr Geithner accused China of “manipulating” its currency and promised that the Obama team would push “aggressively” for Beijing to change its policies. The sharp tone and use of the legally-loaded term “currency manipulation” ricocheted through financial markets as investors shuddered at the prospect of a Sino-American spat in the midst of a global slump.
Clearly this was not a slip of the tongue. Conceivably it was a bureaucratic snafu. The tough language came in a 102-page document answering numerous questions from senators—an odd place from which to lob a bombshell at Beijing. If so, it speaks poorly of a man who is already in trouble for failing to pay attention to his taxes. Most likely, therefore, Mr Geithner’s language suggests a change in Washington’s tactics towards China.
The use of the acronym snafu by the Economist, a staid and respectable journal in which the commentators do not express their emotions by using explicitly obscene language, and its ad hominem reference to Timothy Geithner's history of alleged tax evasion, may reliably be taken as indications that the feelings of the editors of the house magazine of global high capitalism at this turn in US policy on China went far beyond mere irritation.
Without a doubt, the accusation against China had been authorised by the new President. In the 102 page document which he presented to the Senate Finance Committee, Timothy Geithner used the exact same phrase twice:
President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices.
Geithner also used another formulation in which the threat was more veiled:
In the short term we need coordinated stimulus to strengthen demand here and in China. Once demand is stabilized we need a constructive dialogue with China that focuses on helping China move towards growth that relies more on domestic consumption and less on exports.
It is important to note that the US Treasury Department, to the helm of which Mr Geithner has succeeded, is not merely charged with the responsibility for the domestic economic affairs of the United States. The Treasury Department is also one of the US Government's main vehicles for the furthering of its foreign policy goals, by means which include imposing sanctions and other measures against other countries to achieve political and economic objectives. Among the questions submitted to Geithner by the senators were several which related to possible changes in the conduct of the USA's financial, trade and travel blockade against Cuba- to all of which he avoided giving any definite answers. But on the issue of China, he was not so vague. In his answer to one of the questions, he stated:
While in the U.S. Senate he [Obama] cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles. The question is how and when to broach the subject in order to do more good than harm.
Implicit in this remark is the notion that the USA, which despite its current troubles is the world's biggest consumer and still dominates the international trade and financial institutions, is the global economic enforcer; and must therefore debate how to use its power to issue and withdraw passes, free or otherwise, even to nations several times its size in population.
The Economist- an organ whose cosmopolitan viewpoint expresses not only the raw desire for the highest possible corporate profits, but also the fear that the global sum of profits may be reduced by any infringements against de-regulation and 'free trade'- did not, of course, challenge that uncontroversial notion; but it did react with undisguised horror to Timothy Geithner's threat of a forthcoming trade dispute with China:
China’s bilateral trade surplus with America has long been a lightning rod in Congress, and with unemployment up the protectionist pressure is sure to rise. The $800 billion stimulus package making its way through Congress already has dubious “Buy American” measures that demand government spending should be on American goods. By sounding tough up front, the logic goes, the Obama team will be better able to diffuse the more extreme protectionist sentiment.
Unfortunately, this strategy is dangerous on a number of counts. The basic economic analysis—that a stronger yuan [China's currency], on a trade-weighted basis, is necessary to rebalance China’s economy away from exports—is surely right. But the world’s immediate problem is a dramatic shortfall in demand across the globe and that will not be righted by exchange-rate shifts. Currency movements switch demand between countries; they do not create it [...]
More important, the political calculus could easily misfire. Domestically, Mr Geithner’s comments may simply fan congressional flames for tougher action on China. Lindsey Graham, a senator who first pushed for a 27.5% tariff against China in 2005, called the comments “music to my ears”. And Sino-American economic tensions are already rising as Chinese officials hotly dispute the idea that their savings surplus had anything to do with the current global mess. (An official at China’s central bank recently called the idea “ridiculous” and an example of “gangster logic”). Traditionally, Chinese officials do not respond well to public admonition and, given the scale of China’s economic woes, they are likely to be pricklier now.
The stakes are extremely high. Everyone knows that protectionism and beggar-thy-neighbour policies exacerbated the [1930s] Depression. With the global economy in its most dangerous circumstances since the 1930s, rising Sino-American tensions is the last thing anyone needs.
Although he did not say this with specific reference to the likelihood of a US-China trade confrontation, Prime Minister Gordon Brown made clear in his speech at the World Economic Forum on January 30th that he shares the view that the adoption of protectionist policies will worsen the crisis. His opinion was was supported by Pascal Lamy, Director-General of the World Trade Organisation.
Given that this is the prediction of these pro-business luminaries, why has the new President of the United States of America gone much further than the muted anti-China rhetoric of the George W Bush administration, and authorised the threat of a protectionist trade war against the People's Republic of China? To answer that question, we should consider that there are complexities to the interests which Barack Obama must seek to satisfy.
Every US President needs to balance the short and medium term desire of the US-based corporations for the highest possible profits, against the strategic requirement for the United States to maintain its role as the dominant global nation- thus assuring, in the long term, the best position for the USA's corporations to make maximum profits.
The industrial rise of China has been exceedingly profitable for many of the biggest US firms- gaining not only by outsourcing production to factories where the workers have much lower wages than in the USA, but also by marketing cheap Chinese-made products to consumers in the US and other Western countries. And, perceived at the time to be an added bonus for the USA, when China needed somewhere to park some of the financial surplus which it accrued as a result of its export earnings, it decided to lend much of that spare cash to the United States of America.
On the other hand, China's economic rise- if it is allowed to continue at the rapid pace of the last thirty years- will eventually, in another three decades or less, unseat the USA from its top dog global position. For the long term strategic thinkers among the US elite, this is an intolerable prospect which must sooner or later be addressed, by whatever means are available.
Further, some US companies have lost rather than gained as China has risen. Those in the paper and steel industries, for example, have been complaining vociferously that their production operations, which have remained based in the USA and cannot be outsourced because they rely on locally extracted raw materials, are unable to compete with the steel and paper exported from China.
Last, and very much least in the priorities of the Bush administration, are the economic interests of the workers in the USA, who have been losing out in competition with the much lower-paid workers of China. Although there are other factors including the introduction of new technology, the weakness of the trade unions and de-regulation within the United States, the international process of globalisation which has entailed the rise of China is one of the main factors which have ensured that the average hourly pay of US workers has not risen for over thirty years.
Therefore the trade unions, supported by many in the Democrat Party, have increasingly been demanding protectionist measures, and during his election campaign Barack Obama promised an end to the prioritisation of free trade over the interests of 'main street'.
Though some commentators remarked that Obama only made such statements in order to get elected- noting that, once in office, the previous Democrat President Bill Clinton was an aggressive promoter of free-market globalisation- Timothy Geithner's 'bombshell' against China may be a sign that the new President intends to put the rhetoric into reality.
The blame-China narrative
In the Washington Post, Geithner's attack on China was more than welcomed. Its columnist Sebastian Mallaby, who is a member of the USA's uber-think tank, the Council on Foreign Relations, took the Obama nominee's accusation as his cue to take the argument to its conclusion- promoting the theory, which was originally put forward by the outgoing US Treasury Secretary Hank Paulson on the eve of his replacement by Tim Geithner, that it is the People's Republic of China which is mainly to blame for the global economic crash. Mallaby claimed:
Geithner is correct that China manipulates its currency. What's more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China's cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
China's leaders protest that they are being unfairly scapegoated. Yet while there are rival accounts of the origins of the crisis, neither has the explanatory force of the blame-China narrative.
This theory, which has an obvious attraction for US politicians and opinion-formers, was also highlighted in a Sky News article on 1st February.
In evaluating the 'blame-China narrative', the accusation of currency manipulation ought first to be scrutinised. The word 'manipulation' suggests that the Chinese have been deliberately changing the exchange rate of their currency in order to gain an unfair advantage. But in fact what China did, a decade and a half ago, was to peg its currency (the renminbi, the main unit of which is the yuan) at a fixed rate relative to the dollar, and after that they kept it at that rate. As the Forbes Investopedia explains, there is a very sound reason for a Third World country to do this:
The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg the investor will always know what his/her investment value is, and therefore will not have to worry about daily fluctuations.
As the USA has the world's preponderant currency, and is moreover the overall leader in cutting-edge technologies and is thus a very important source of high-tech investment- if one is going to choose a foriegn currency on which to peg ones own, it will usually be the US dollar.
The rate at which the Chinese fixed their currency in 1994, at 8.3 yuan per dollar, allowed Chinese-made goods to be sold relatively cheaply abroad but on the other hand made it relatively expensive for the Chinese to import goods from other countries; nevertheless, as the export-focussed industries of the People's Republic bloomed, those industries required fuel, raw materials and production equipment from abroad, and their workers and managers fulfilled some of their wants by means of consumer products from abroad. So not only China, but the suppliers of China, benefited.
However, as was observed in a September 2008 article by the aptly-named David Dollar, who is the World Bank’s Country Director for China and Mongolia, while the yuan was held stable against the US dollar, China's currency therefore moved together with the dollar as the US currency fluctuated against the other major currencies:
...the effect of this choice of "stability" for the currency was to bring about gradual and sustained appreciation of China’s effective exchange rate from then until about 2002. Over that period on average the U.S. dollar was appreciating against China’s other trade partners and China followed the dollar up.
This turned out to be a good exchange rate strategy for China. [...] from 1994-2002, China had a modest current account surplus that did not change very much. As a developing country with rapid productivity growth, China’s external accounts were kept roughly in balance by the gradual appreciation resulting from the link to the dollar.
The problems for China began early in the 2000s, as the dollar began to devalue against other major currencies in the wake of large fiscal stimulus in the U.S.
It should be noted that this fiscal stimulus, which took the form of a cut in the interest rate and which led to a big decline in the value of the US dollar relative to the other major currencies, was the temporarily successful attempt by the US authorities to prevent the 'dot.com' stockmarket crash of 2000 from turning into a serious recession in the United States. What followed can hardly be described as 'manipulation' by the Chinese:
Since China had good results from the peg to the dollar during the 1990s, it was a natural choice for the country to stick with the peg. However, in this new environment, the Chinese yuan then followed the dollar down – the effective depreciation from 2002 until 2005 was nearly 20 percent. Combined with the ongoing productivity growth, this devaluation led to rapid expansion of the export sector and the expansion of the external surplus to a whopping 12 percent of GDP in 2007.
Here it must be pointed out that, because the Chinese currency remained stable against the US dollar, China gained no increased currency-related advantage in its exports to the USA, or in the competition of its manufactured goods againsts US-made products. Any currency-related trade advantage which China gained in this period was in respect of the other countries whose currencies had risen in relative value due to the temporary decline of the US dollar.
The United States Treasury Department made no complaints when the Chinese lent a large part of their surplus funds to the USA, much of it by buying US Treasury bonds- indeed, the finances of the United States of America became dependent on this Chinese money and speculation abounded about the disaster which might result if China were to withdraw this cash. But although the rate of the yuan to the dollar had been the same since 1994, US officials including the incumbent Treasury Secretary Hank Paulson, began to pressurise China to change its exchange rate which, they now alleged, was giving the Chinese an unfair trade advantage in competition with US-made products
In 2005, the Chinese partially acceded to the US demands by allowing their currency to begin rising significantly against the US dollar. Since July 2005, the yuan has risen by 19% in relation to the dollar; and given that one of the effects of the current crisis has been a fall in the value of the other main world currencies vis-a-vis the dollar, the overall result has been a very steep rise of about 30% in the average value of the yuan against the currencies of China's main trading partners.
David Dollar points out:
As a result of the effective [currency] appreciation since 2005 we are now starting to see a decline in China’s external surplus. It is in everyone’s interest for the decline in the surplus to be gradual. Too rapid a decline would be a big shock to China’s real economy and would drastically reduce the financing available for the external deficits of the U.S. and many developing countries. While the U.S. wants to gradually reduce its external deficit, it will need significant financing for the next several years.
In which case, the Economist is surely right to be worried about the implications of Treasury Secretary Geithner’s fusillade, and the Chinese are right in refusing to be intimidated. David Dollar added:
There is a lot of potential for misunderstanding in this area. China feels that it has had a rapid effective [currency] appreciation and now wants to see what the real effects are before going further.
Manipulating the facts
Although he asserts that China caused the global economic crisis, Sebastian Mallaby of the Washington Post and the Council on Foreign Relations does not argue that the means by which China caused the current economic crisis was by successfully penetrating the US consumer market and out-competing US-made goods. Rather, the 'blame China' theory boils down to the claim that the Chinese lent the USA too much money, and that the United States became a passive victim by borrowing all this Chinese cash.
Mallaby adduces in proof of this theory the weakness of what he regards as the only other possible explanations for the present and deepening economic catastrophe. Sebastian Mallaby puts forward two 'rival accounts' and then knocks them down:
The first rival account is that the crisis reflected failings of U.S. financial regulation. Such failings exist, but most have been around for years. The mortgage bubble reached its craziest extremes in 2005-07, when China was flooding the world with cheap capital.
Moreover, regulatory failings exist not just at one regulator but many. The Securities and Exchange Commission failed to check risks at broker-dealers such as Bear Stearns. State insurance regulators failed to prevent the collapse of AIG. The Federal Reserve failed to see that banks were pouring capital into toxic securities that they then held off their balance sheets. European regulators were no better, even though they had adopted a supposedly more up-to-date set of capital standards. The lesson: Faced with a deluge of cheap money, no regulatory regime can be expected to prevent bubbles.
But it was not China, but rather the US authorities who de-regulated the USA's entire financial system, and moreover, encouraged and pressurised other countries to de-regulate theirs; and they did this inspired by their laissez faire ideology and prompted by the demands of the corporations, especially the financial sector. And the cash provided to the USA by China was at least money based on real value, generated by the earnings of its manufacturing industry- as distinct from the scores of trillions of dollars of fictitious values in the form of CDOs, SIVs and the other arcane 'instruments' created by the geniuses of Western finance, all of which are now revealed to have no value whatsoever.
Sebastian Mallaby then gets to grips with the only other explanation for the crisis that he can conceive of:
The second rival account of the crisis accepts that its origins lie less in regulatory failings than in economic pressures. But it blames the bubble on two mistakes at home rather than on the glut of capital from China. Americans should have controlled the urge to splurge, the thinking goes, and borrowed less Chinese money. And the Fed should have shut down the easy-money party by raising interest rates.
If Americans' insatiable appetite for loans explained the flood of Chinese capital into the United States, we would have seen the evidence in a rising price for those loans -- that is, higher interest rates in the bond market. But bond rates were strikingly low at mid-decade. This strongly suggests that it was the supply of lending that went up, not the demand for it. Chinese money flooded into the United States because of the push factor from China, not the pull factor from Americans.
Was China the only push factor, or even the main push factor? It was not Chinese-owned companies but US companies, operating under US (de)regulations, that threw money at US consumers, at interest rates set in New York and Washington, not in Beijing or Shanghai. Those US companies earned increasingly extravagant profits; and the exciting possibilities of the sub-prime and credit card markets, which allowed loans to be offered at enticingly low initial rates, which were later cranked up to highly expolitative rates of re-payment after a few months or years, were not the creation of Chinese minds.
As for the financial bubble- which had been expanding since the early de-regulations of the 1980s, well before China had any surplus cash to lend to the USA- this was not identified as a bubble for three main reasons: firstly, it was making some people very, very rich; secondly, the hubristic ideologists of the free market had dispensed with the old-fashioned notions of the Marxists and other unfashionable analysts that all value is created in what has now been suddenly re-discovered to be the 'real economy' of industrial and recognisably useful service production; and thirdly, that financial bubble, which was then declared to be the result of 'wealth creation' by the hedge-funders and other financiers, was what was keeping the US, British and other Western economies on the road of economic growth, keeping the consumers happy by means of debt-based retail therapy and the illusion of rising property values, although the majority of the workers in the Western countries had not enjoyed a significant rise in their post-inflation wage rates for many years.
But, despite all this, and the despite the fact that the crisis began in the USA, and that the United States, not China, dominates the IMF, the World Bank and the World Trade Organisation, and that China, in order to achieve the easing of the US-imposed Cold War economic sanctions against it, began in 1978 to gradually move away from socialism and towards capitalism, and despite - or rather because - China adopted the only available path to economic success in such circumstances- the path of attracting foriegn investment and exporting cheap manufactured goods to richer countries - China did play its part in creating the conditions for the present economic meltdown.
Irresespective of whether it is rising or falling in value, every coin has two sides; and while the globalised economy boomed the industrialising Chinese were perceived with as much awe as were the bankers and brokers of London and New York; inescapably therefore, China must share in the blame for the current debacle.
The People's Republic of China, in becoming a platform for the combination of its enormous low-paid labour force with modern production technology imported by means of attacting Western investments, and thus developing into a huge exporter of products, contributed to the rising global abundance of manufactured goods; although of course the vast majority of the people of the world could still barely afford to feed, house and clothe themselves and therefore those goods were aimed mainly at the rich consumers of the West and Japan.
Indeed, even the people of the rich countries, the majority of whose workers had not had a significant rise in real hourly pay for many years, could only afford to purchase this annually increasing volume of consumer products by means of accepting the increasingly fervently offered opportunities to deepen their debt, as purveyed by the banks and mortgage companies.
In the conclusion of his article, Sebastian Mallaby makes a remark which contains a grain of truth:
...there is no getting around China's culpability. The country relies on the sort of export-focused growth strategy that other Asian Tigers have pursued, with the difference that China is too big to go this route without destabilizing the world economy.
To the extent that China is guilty, it is because of its enourmous population size and because the USA and the US-controlled international trade and financial institutions would only relax their sanctions against China if it made the transition from socialism to capitalism; in which circumstance, the only available development path for China was that of becoming an export-oriented 'tiger economy'. On taking that path, the People's Republic of China exceeded all expectations.
It was by its very success as a rising capitalist nation, and by its great contribution to the temporary success of the capitalist global economy, that China played its part in creating the conditions which led to the eventual crash.
Confrontation inevitable
While the editors of the Economist are aghast at the prospect of a protectionist trade war by the USA against China, nevertheless they, along with the US Treasury Secretary and the Director of the IMF want the Chinese to change their pattern of economic development, by re-valuing their currency, 'expanding domestic demand' and ending the export-orientation of their industries. In fact, by accelerating the pace of state-led infrastructure projects, China's Communist Party leadership is increasing domestic demand, but that is not what the USA and the IMF, its multilateral proxy, are talking about. The West wants China to get its population of individual consumers to spend more money as a substitute for the earnings that China would lose if it reduced its exports, and the Chinese leaders have very sound reasons for resisting the pressure to do this.
China is a Third World country, and despite its recent decades of rapid growth it has a per-capita GDP, calculated by purchasing power parity, of only one-eighth that of the United States and one-sixth that of the West European countries. Even if each Chinese consumer were to increase their spending in the shops by, say, 25%, they would still, despite their large number, have only a small fraction of the purchasing power of the hundreds of millions of people in the rich countries. As Sebastian Mallaby's reference to the other 'Asian Tiger' economies indicates, history has not shown any other path to rapid economic development for a capitalist Third World country in a capitalist world except that of export-orientation; and by taking this path China has attracted foreign technology, built its industries, kept its unemployment rate relatively low in comparison to other less-developed countries, and delivered steady improvements in material living standards.
China's dynamic development has been temporarily de-railed by the economic crisis, but the Chinese leadership is counting on the global depression bottoming out in the next few years, following which China can resume its rapid export-led growth. Of course, this is a gamble. On the other hand, for China to take the option of ceasing its export-orientation would not be a gamble because the result would be certain- long term economic stagnation, accompanied by even higher unemployment and worse impoverishment than the present crisis will cause, and as a permanent feature.
Therefore the Chinese Communist Party will refuse to accept that option, and therefore we will see if the new US administration is willing to deliver on its threat of protectionist measures against China, despite the predictions that this would deepen and lengthen the current crisis.
Though the signs are not good, perhaps some compromise can be reached which postpones an economic confrontation. But one thing can be predicted with absolute certainty. The USA will not indefinitely continue to accept the gradual but ever-nearing prospect of being usurped from its position as the world's dominant nation, especially by a country whose ruling party- however capitalist its economic policies- is the Communist Party. Eventually, and by whatever means are available to it, the United States will confront China not merely as a competitor but as an enemy.