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In a recent article at the New Left Review, Ho-fung Hung challenges much of the conventional wisdom about China’s reforms since the end of the 1970s. Titled

“America’s Head Servant? The PRC’s Dilemma in the Global Crisis” (New Left Review No. 60, November-December, 2009), the article develops the impression that the Chinese leadership is at crossroads.

The export led and financial bubble “model” followed until the recent Great Recession is in despair. The internal “fight” inside the Communist Party and the discussion by the Chinese economics nomenklatura are testing the limits of the past political equilibrium. The way out from those strategic dilemmas is uncertain. “Whether the coastal urban elite group could continue their monopoly of power or the monopoly will be weakened depend very much on the contingency of the current succession struggle that will go on until the scheduled succession in 2012”, says Ho-Fung Hung in the interview below.

The author has a wish: if the Chinese leadership solves the dilemma, giving more political and economic role to the countryside, China would end its servitude to the Americans and truly mutate in a superpower. If not, China risks a future as a tiger paper.

PROFILE

Ho-fung Hung, a native of Hong Kong and a graduate of the Chinese University of Hong Kong, is an assistant professor at the Department of Sociology at the University of Indiana, in the US. He received his Ph.D from Johns Hopkins University in 2004. His current projects include one that expounds how the Confucianism legacy shaped China’s trajectories of state formation and popular protests from the eighteenth century to the present, in contrast to the Western trajectories. Another project examines the dynamics and limits of the current economic ascendancy of China, as well as its impact on global capitalism. A third project traces China’s changing conception of nationhood in light of Beijing’s contentious interaction with Tibet, Hong Kong and Taiwan since 1949. He was the editor of China and the Transformation of Global Capitalism (Johns Hopkins University Press, August 2009).

HIGHLIGHTS

“China is the single most important economy in the [world crisis] process at this moment”

“The GDP growth in China for 2009 so far has been driven by investment alone – fixed-asset investment accounts for more than 90% of growth in the first three quarters. Many of these investments are not efficient and profitable, and will generate fiscal troubles of Chinese governments (at central and local levels), bad loans and overcapacity.”

“Intermittent reports from within and outside China show that many government officials and well connected are able to use part of the stimulus loan to speculate in stock market and real estate market that account for the comeback of bubbles in those two markets.”

“Urban elite benefiting hugely from foreign investment and export have been influential in shaping China’s policy and course of development in the last two decades or more. This elite group is still overly represented in China’s policy making process and voices representing inland, grassroots, and rural sectors are weak in the political center.”

“Readjusting exchange rates could alleviate the imbalance a bit but won’t solve the problem at its root.”

“China manifests great potential to become a new center of growth in the global capitalist system, but it is not guaranteed, as it requires China to solve a lot of intractable problems first.”

INTERVIEW by Jorge Nascimento Rodrigues © janelanaweb.com, 2009

Q: The critical problem for the recovery of this global crisis is, for the first time in Capitalist cycles’ history of the last two hundred years, what will happen with China’s economic performance? China’s economic weather is at the center stage of the world near future – a way out for recovery or a double dip recession?

A: The recovery of China is crucial to the global recovery in two senses: first its fixed-asset-investment-driven recovery over the last few months generated new demand for oil, other raw materials, steel, and capital goods, etc that help fuel the recovery (or at least restrain the fall) of capital goods and raw materials exporting economies like Brazil, Australia and Japan. Secondly, its continuous willingness and capability in purchasing US Treasury bonds is a huge factor that enables US fiscal-stimulus program – and hence US recovery – despite US’s huge fiscal deficit. All major economies are of course interconnected and all important in the global recovery process, but China is the single most important economy in the process at this moment. If its recovery continues into 2010 and beyond, then the global economy can’t do very badly. But if its recovery looses steam in the next year or so – as many economists in China fear – after China’s stimulus fades out, then the global economy can be in big trouble again.  The second scenario is not unlikely, as the GDP growth in China for 2009 so far has been driven by investment alone – fixed-asset investment accounts for more than 90% of growth in the first three quarters. Many of these investments are not efficient and profitable, and will generate fiscal troubles of Chinese governments (at central and local levels), bad loans and overcapacity. These problems could constrain China’s growth in the years to come, if the export sector has not significantly recovered by then and private consumption in China has not yet been pumped up, then China’s growth will falter. Investment driven growth could only generate short-term good GDP growth data, but will create bigger problem in the longer run

Q: Who is profiting from the huge 4 trillion yuan (400 bilion euros) Chinese mega-package of State stimulus? The traditional addiction for real estate urbanite bubble and financial zhuang-jia, or the real economy and the development of a domestic consumer middle class huge market?

A: Large trunk of the stimulus has been delivered in the form of generous loans from state banks, which preferred to lend to local governments and state-owned enterprises, which in turn use these loans to build infrastructure and industrial capacity. The state sector has therefore benefited tremendously. And intermittent reports from within and outside China show that many government officials and well connected are able to use part of the stimulus loan to speculate in stock market and real estate market, that account for the comeback of bubbles in those two markets.  At the same time, small and medium private enterprises are complaining that they still find it difficult to obtain loans, and contrary to initial expectation, only very small percentage (less than 20) of the stimulus money is used to shore to social programs like social security and medical insurance; and most of the investments under the stimulus go to urban instead of rural sectors.

Q: Do we must consider as a plausible scenario the crash of the Chinese bubble? The shift of the centre of global capitalism from the US to China is at risk?

A: It is dealt with in my response to question 1. Yes, there is such a risk, but it is still early to say whether the Chinese government could turn the current recovery into sustainable growth. It depends on whether export market could recover to its full health (which is unlikely given unemployment in US and elsewhere in the global North), and whether the Chinese domestic consumption market could grow further – it has been growing handsomely in recent years, but still no match for the growth in industrial capacity, so much more consumption growth is needed. In a word, if the Chinese government manages to shift the Chinese economy to a more balanced one driven more by private consumption, then China’s recovery will be sustainable.

Q: Has China leadership political conditions to shift from the “tiger” export-led economic strategy to a different model? You refer the coastal urban elite as the dominant capitalist class in China nowadays. Who other social segments are able to balance that mix of nomenklatura, financial and real estate speculators, and go global investment and export-import people?

A: Urban elite benefiting hugely from foreign investment and export have been influential in shaping China’s policy and course of development in the last two decades or more. This elite group is still overly represented in China’s policy making process and voices representing inland, grassroots, and rural sectors are weak in the political center. The current leaders Hu Jintao and Wen Jiabao have been relatively tilted toward the latter group, but they have been constrained by the first elite group as vested interest – it is why their policies to improve the living of the underprivileged and to redistribute income are often half hearted or could not be fully implemented. Whether the coastal urban elite group could continue their monopoly of power or the monopoly will be weakened depend very much on the contingency of the current succession struggle that will go on until the scheduled succession in 2012.

Q: OECD countries and West analysts currently insist in a huge revaluation of the Chinese currency against a basket of other major currencies (like the dollar and the euro) as the tool for rebalancing the world imbalances. Do you think so?

A: It could help a lot but not very much, as the root cause of global imbalance is the excess industrial capacity in China (and other emerging economies). In the end what we need is to break the global economy’s dependence on the US as the “consumer of last resort,” and raise private consumption significantly in China and elsewhere. As I point out in the article [at New Left Review], this has to involve redistributing income and purchasing power to the working peoples in China and other places, who have been marginalized in two decades of globalization. Readjusting exchange rates could alleviate the imbalance a bit but won’t solve the problem at its root. Recall that the Plaza Accord in 1985 that forced Germany and Japan to revalue their currencies upward was also out of the consideration of rebalancing the world economy (e.g. US trade deficit), but we already saw that in the 20+ years after the Accord, the global imbalance did not shrink but grow.

Q: Recently the Chinese monetary authorities reaffirmed its policy linkage with the dollar as the world reserve currency, despite its other public political criticism about the hegemony of the dollar. Which policy trend will prevail in China – dollarization or diversification?

A: As I point out in the NLR article, the Chinese government tried to diversify its investment but so far did not yield good results; and the big risk of diversification is that it could trigger a drop in dollar and T-bonds, and this could in the end devaluate the mass investment that China had already made in US debts over the years.  In the short run china has no choice but to continue purchasing dollar asset to support the status quo. The fundamental problem is that the Chinese yuan is not convertible so the Chinese government has to accumulate US dollar for its purchase of everything (from oil to other assets) in the world.  The Chinese government of course wanted to internationalize the yuan as a fundamental way to reduce China’s dependence on the dollar, but it will take a lot of time. And more importantly, that will require the liberalization of China’s capital account that the leaders are so far reluctant to do. It also requires China to ensure international investors that its government is transparent, stable, and trustworthy – the essentials behind any credible and internationalized currency. Again, it will take time and China is nowhere near this position.

Q: What was the most important message of your last book China and the Transformation of Global Capitalism?

A: One key theme of the book is that China manifest great potential to become a new center of growth in the global capitalist system, but it is not guaranteed, as it requires China to solve a lot of intractable problems first. The book was finished before the global crisis. The crisis verified this view of the book: on the one hand the problems China is facing when trying to sustain its growth in the aftermath of the crisis is much bigger than before the crisis; but at the same time, I still hope that the crisis could serve as a wakeup call that in the end will push China to shift its course of development into a more sustainable and equitable one.