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America’s Head Servant? The PRC’s Dilemma in the Global Crisis

by Hung Ho-fung | 10 November 2009 | 22 Comments | Last modified: 26 Apr 4:07 am

New Left Review has just published an article by Ho-fung Hung that:

  • sketches a history of the trade dependence of China on the US;
  • compares China to other industrializing East Asian countries and finds China an outlier, largely based on what Hung calls the urban bias of the Chinese state: resources have continued to be extracted from the countryside to urban and industrial endeavors, and the lack of development in rural areas has meant that manufacturing wages have stagnated. This is the source of China’s ‘miracle’ but also a tragic flaw since it has meant that:
  • China’s coastal and urban elite have it in their interest to remain dependent on US/European markets for exports, and have purchased debt accordingly; moreover the tragic flaw has also implied that:
  • China’s large stimulus package has provided only temporary respite by boosting investment, not consumption, and thereby pinning (misplaced) hope on the renewed growth of exports in the near future
  • Hung’s solution would be to reduce exports and stimulate domestic demand by improving compensation for workers and transferring resources to the countryside. He suggests that the current leadership would like to do this, but it blocked by the coastal-urban elite group of officials-capitalists
  • until there is a shakeup in this relationship, China will remain a servant of the US


The entire article (and PDF) is available without restriction.

Excerpt (article conclusion):

Over the course of the last two decades, China has emerged as the final assembler and exporter in an East Asian network of production. It has also attained the status of largest creditor to the us and largest holder of foreign reserves, and demonstrated the potential to become the market of the world in addition to being its workshop. China is thus well poised to carve out a new regional and global economic order by helping Asia and the global South to move out of their market and financial dependence on the North in general and the us in particular.

China’s potential to lead, however, is far from being actualized. So far, the prc’s strategy of lending to the us to facilitate purchases of Chinese exports has only deepened China’s, as well as its suppliers’, dependence on American consumers and the us bond market, making them vulnerable to any turbulence in the global economy. The prc’s long-term export competitiveness is rooted in a developmental approach that bankrupts the countryside and prolongs the unlimited supply of low-cost migrant labour to coastal export industries. The resultant ever-increasing trade surplus may inflate China’s global financial power, in the form of expanded holdings of us debt, but the long-term suppression of wages restrains the growth of China’s consumption power. The current financial crisis, which has decimated consumer demand in the global North and increased the likelihood of a collapse of the us bond market and the dollar, is a belated wake-up call for an urgent change of course.

Beijing is well aware that further accumulation of foreign reserves is counterproductive, since it would increase the risk associated with the assets China already holds or else induce a shift to ever riskier ones. The government is also very aware of the need to reduce the country’s export dependence and stimulate the growth of domestic demand by increasing the working classes’ disposable income. Such a redirection of priorities has to involve moving resources and policy preferences away from the coastal cities to the rural hinterland, where protracted social marginalization and underconsumption have left ample room for improvement. But the vested interests that have taken root over several decades of export-led development make this a daunting task. Officials and entrepreneurs from the coastal provinces, who have become a powerful group capable of shaping the formation and implementation of central government policies, are so far adamant in their resistance to any such reorientation. This dominant faction of China’s elite, as exporters and creditors to the world economy, has established a symbiotic relation with the American ruling class, which has striven to maintain its domestic hegemony by securing the living standards of us citizens, as consumers and debtors to the world. Despite occasional squabbles, the two elite groups on either side of the Pacific share an interest in perpetuating their respective domestic status quos, as well as the current imbalance in the global economy.

Unless there is a fundamental political realignment that shifts the balance of power from the coastal urban elite to forces that represent rural grassroots interests, China is likely to continue leading other Asian exporters in diligently serving—and being held hostage by—the us. The Anglo-Saxon establishment has recently become more respectful towards its Asian partners, inviting China to become a ‘stakeholder’ in a ‘ChiAmerican’ global order, or ‘g2’. What they mean is that China should not rock the boat, but should continue to help maintain American economic dominance (in return, perhaps, for more consideration of Beijing’s concerns over Tibet and Taiwan). This would enable Washington to buy precious time to secure its command over emergent sectors of the world economy through debt-financed government investment in green technology and other innovations, and hence remake its ailing supremacy into a green hegemony. This seems to be exactly what the Obama administration is betting on as its long-term response to the global crisis and declining American power.

If China were to re-orient its developmental model and achieve greater balance between domestic consumption and exports, it could not only free itself from dependence on the collapsing us consumer market and addiction to risky us debt, but also benefit manufacturers in other Asian economies that are equally eager to escape these dangers. More importantly, if other emerging economies were to pursue a similar re-orientation and South–South trade were to deepen, then they could become one another’s consumers, ushering in a new age of autonomous and equitable growth in the global South. Until that happens, however, a recentring of global capitalism from West to East and from North to South in the aftermath of the global crisis remains little more than wishful thinking.

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22 comments on “America’s Head Servant? The PRC’s Dilemma in the Global Crisis

  1. Thanks, I was just about to post this! And great overview of the main arguments.

  2. This is very interesting. Of course, the same economic argument for redirection of investment holds true in the US itself, though the rural-urban distinction does not. Disinvestment in US cities as the centers of production of tangible wealth is a phenomenon 30 years in development.

    That elite collusion of capital (however haphazard) along these lines occurs internationally is no surprise. My question is: What are the ground-up networking possibilities between the American and Chinese grassroots? Alternatively, is this a situation of isolated agendas to be fought for and then reconciled with new (elite) powers in place?

  3. John Gulick on said:

    I find the material on splits within the CCP ruling elite, with the urban-coastal faction winning, to be the most interesting and innovative segment of this article. But beyond associating policy twists and turns with the infighting of seemingly self-evident factions, and speculating on the Hu-Wen succession, what evidence does Hung really give that these factions exist in the forms and with the preferences he purports they do?

  4. John Gulick on said:

    Not that I gravely doubt Ho-fung’s analysis; I just crave a little more documentation.

  5. Ho-fung Hung on said:

    thanks for asking. tons of English sources out there, which I cited and the editor cut out for the sake of conciseness. Besides Cheng Li, works by Victor Shih (_Faction and Finance in China_), Stephen Kaplan (on China’s exchange rate), and David Zweig (_Internationalizing China_) are good starting points.

  6. Seems that Ho-fung gets this argument straight from Cheng Li. Li has lots of papers on the web that delve into this issue.

    From what I’ve seen, however, Li, doesn’t argue for that the dominance of the elite faction, as Ho-fung suggests. Li contends that there are two coalitions at the apex of the party/state - elite and populist - that come from different backgrounds, have different core constituencies, and together share power. If anything, Li argues that the populists have had the upper hand since 2003 (I mean, they’ve got the highest reins of the government and party, and have a majority in the Central Committee, these are not trivial things!), and it’s hard to argue that there hasn’t been a real shift in policy since Hu-Wen came to power. Moreover, the new administration has taken aim at many of the problems Ho-fung points to: urban/coastal bias, domestic demand constraint, protection of ‘vulnerable’ groups.

  7. Ho-fung Hung on said:

    Cheng Li has a headcount: ”
    In the Central Committee, while the Populist coalition holds more positions, the Elitists hold more seats in the Politburo.” the populists (or tuanpai in other’s classification)had been surely at the upper hand in the few years after Hu-Wen assumed leadership, but Hu-Wen reform was also resisted fiercely at local level, as I point out in the article. The pick of Xi Jinping over Le Keqiang, Hu’s favorite, as the next leader, as well as the recent revival of Jiang Zemin does indicate that the pendulum is shifting to the other side. of course with the obscurity of China’s political process, approximating through circumstantial evidence is the best we can do

  8. Ho-fung Hung on said:

    and here is the full list of current politburo on which Cheng Li’s headcount is based:
    and the politburo, rather than the 300+ central committee is the real power center of the CCP that makes the most important decisions.

  9. John Gulick on said:

    Ho-fung, thanks for responding, and responding so quickly, to my rather noisome comments. It does seem that the _NLR_ prefers a lean format with few citations, which I actually rather like; I should have kept that in mind. As for the HHF vs. JJL debate on the factional balance of power in the Chinese party-state, I’ll just sit back and watch the fur fly.

  10. Yes, Ho-fung, thanks for responding! Your article was interesting, thought-provoking and timely, and I hope it sparks lots of discussion.

    I don’t doubt that what Cheng Li calls the elitist faction is powerful, as is reflected in their numbers in the politburo. I simply question the argument that they are currently dominant, or have been since Hu-Wen came to power. I think there is ample evidence to support this - in the personnel, in government institutions, and in policy. Maybe they will come back to dominance in the future, I don’t know.

    Arguing that the coastal/urban vested interests are able to *resist* attempts by the central gov to reign in local growth machines points to the fact that officials and businesses collude to deflect measures they don’t like. But the capacity to resist is different than the capacity to set national policy.

    And there’s the rub. This stuff hinges on the central state’s post-1998 attempts to change course, and the scope of the resistance (as you lay out towards the end of your RIPE paper). Your NLR paper I think pretty clearly argues that the central state has failed, if it ever attempted, to institute major changes. I’m less clear on this point. I would completely agree if the period is before 1998, but after that I keep on finding contradictory evidence.

    Last, the US should pick another winner if it thinks it’s going to lead in ‘green tech’:

  11. John Gulick on said:

    “It doesn’t matter is the cat is a white cat subsidizing export production or a red cat delivering local welfare, herding cats is tougher than being a wayward cat…”

  12. Ho-fung Hung on said:

    John and JJ: thanks for the great discussion. Like Q&A after a presentation is always as good as the presentation itself.

    For the balance of power between the two factions, it changes from time to time. i do think that the populists are dominant right now but the pendulum is shifting away from them. In the future I don’t know but I trust that the communist youth league is no match for the 2-3 generations of networking among the princelings/elitist.

    Regarding policy outcome I just don’t see how Hu-Wen reform can be seen as a success. sure there are some successes and official discourse surely won’t miss any chance to frame everything as success, but regarding the implementation of the key policy goals (listed below), observations on the ground are not encouraging at all:

    - curbing overinvestment: overinvestment gets worse, data show it all (btw the state council has recently listed solar panel and wind turbine as sector plagued by glut and low efficiency, what NYT sees as green miracle is in fact outdated-tech quantitative growth)
    - green GDP as new criteria for evaluating local cadres: dead. key advocate, Pan Yue from the environmental bureau, was forced to step down in early 2009, citing bad health.
    - New Labor Contract Law: the crisis mess it up; but right before it local governments were hosting briefing sections to tell foreign investors how to evade it.
    - new socialist village: progress in absolute terms but urban bias persisted (table 3); land grab replacing tax levies as sources of local cadres

    I’m not saying Hu-Wen is bad. I’m in fact a big fan of them. and they do succeed at least to thwart the land privatization initiative (but remember the important 物权法, which legitimatized the loots of the capitalist-official, was passed under their watch). I think emphasizing the reality check, however, is important.

    situations can still change and I can’t rule out the possibility that it will succeed in the end (in the long run, I’m always an optimist), but it depends on how the crisis/recovery continues to play out in the short-medium run…

  13. langyan on said:

    Interesting discussion. I just saw this piece by Willy Lam with his take on the factionalism: “The CCP’s Disturbing Revival of Maoism”. Strangely Lam argues that Hu-Wen are responsible for a widening gap between rich and poor.

    “As with most political trends in China, the resuscitation of Maoist norms is related to factional intrigue. Jockeying for position between two major CCP cliques—the so-called Gang of Princelings and the Communist Youth League (CYL) Faction—has intensified in the run-up to the 18th CCP Congress. At this critical conclave slated for 2012, the Fourth-Generation leadership under President Hu and Premier Wen Jiabao is due to yield power to the Fifth-Generation, or cadres born in the 1950s. Bo and Vice-President Xi Jinping, two prominent Politburo members who also happen to be “princelings,” or the offspring of party elders, are among the most high-profile architects of the Maoist revival. Implicit in the princelings’ re-hoisting of the Maoist flag is a veiled critique of the policies undertaken by Hu and his CYL Faction, which have exacerbated the polarization of rich and poor and even led to the betrayal of socialist China’s spiritual heirlooms (Apple Daily [Hong Kong], November 12; Ming Pao [Hong Kong], October 26).” This just seems wrong on fact.

    On the other hand, in China over the summer some left-leaning scholars argued that the difference between factions was not as great as Cheng Li suggests, and that Xi Jinping is as populist in policy as Hu Jintao. Curious as to what you think of this, Ho-fung.

  14. John Gulick on said:

    Willy Lam’s claims are the sort of claims that are so outrageously contrarian (princelings=Mao revivalists?) that you begin to give them serious consideration… and then you go, no, wait a second, this is probably just plain bunk. One can go to the “this is so weird it might be true” well only so often.

    Dr. Lam was (still is?) affiliated with a school where I once taught for a while. My impression is that the university president liked having him on board because of his reliably across-the-board anti-Communist/anti-communist (big and little “c”) views. Which is not to pan all of his work…

  15. John Gulick on said:

    I can’t imagine why Pan Yue suffers from poor health; the bureau he headed was carrying the hopes and expectations of millions of enviros inside and outside China, yet had a budget and staff something like 1/10 (or smaller) than that of the U.S. EPA…

  16. Ho-fung Hung on said:

    Pan Yue was so young and energetic when i saw him back in 2004, when he began to be seen as the face of progressive change in China… As for being “anti-communist,” i really don’t know what it means today. is it against communist ideal, the communist revolution, or the armani wearing, LV carrying communist officials and their wives? Willy Lam surely has a lot of bs to say, but people still tune in to him because he’s well connected to the party-state elite, who times and again use him to divulge messages to the outside world

  17. Ho-fung Hung on said:

    Lanyan: as i see it, in the “always safer to be left than right” mindset all leaders tended to put up their left-wing mask (however it means) before they consolidated their power: Recall that Jiang Zeming was very anti-market reform in 1990 and 1991, so much so that Deng had to resort to the Southern tour and bring in Zhu Rongji to move him back to the right; Hu Jintao visited xibopo and talked about reviving the maoist spirit in 2004; and it is not surprising if the next generation would follow this “see who’s more red” ritualistic game and put up their Maoist pretension.

    what is more important is what they actually did. When Xi Jinping was chosen as the successor the state media orchestrated a praise of the “Zhejiang model” under his governorship — how he turned Zhejiang into a dynamic regional economy fueled by private enterprises and export; curiously he’s been lying low ever since he’s chosen as the successor. the other elitist Bo Xilai, who is the self-styled commander in chief of Mao Zedong thought today, was surely a free market hugger, no more no less, when he’s in charge of the Commerce Department (and he’s also implicated in gangster politics during his tenure in Northeast, and he’ll never pull his son out of the elite private boarding school in England).

    perhaps I should stop rumbling here, but one very well known economist in China (generally regarded as on the left) once told me in private that in China there was no genuine left among officials — there are those siding with private capital, and those siding with state capital, so what appears to be left-right dispute is in fact inter-capitalist rivalry — it has some truth in it, as what western media recently characterizes as leftward turn of China under the crisis is in fact referring to the expansion of state capital at the expense of private one under the stimulus. at last Willy Lam has got one thing right: according to official statistics urban per capita household income is 3.2 times rural income in 2003, and it is 3.3 times in 2008, under the watch of Hu-Wen, and despite all the rhetoric and supposed good will of closing urban-rural gap…

  18. purple on said:

    Wouldn’t increased wages and economic security in the rural population erode profitability in many export industries ? Thereby leading to possible dramatic increases in unemployment ? That seems to be the quandary the CCP leadership finds itself in, having made the decision 30 years ago to attach themselves to Western capitalism. I imagine if the solution was easy, they would have done so by now regardless of factional disputes.

  19. paper mac on said:

    Hello Dr. Hung,
    As you probably know this article is being fairly widely discussed, and Yves Smith of nakedcapitalism.com recently made a post referencing it (http://www.nakedcapitalism.com/2009/12/the-china-decoupling-myth.html). In the comments, Yves notes the following:

    “First, Roubini remarked before the global financial crisis hit that inflation in China was going to have the effect over time of a RMB revaluation, that prices would increase in nominal terms, so if you have a fixed rate, they increase to your trade partners as well. Wages would have to inflate to at least somewhat keep pace with inflation; you’d seen tremendous pressure from workers if not.”

    She later adds:

    “Prior to the crisis, China’s inflation was running at twice its target level, in the 6-7% range. From our experience in the 1970s, that’s a level at which it starts to affect behavior, and also compounds at a meaningful rate.

    The inflation resulted from China’s inability to fully sterilize its purchases of dollars, which were necessary to keep the RMB from rising.

    Roubini’s point was no matter how China played it, its goods were going to become more costly to its trading partners. Either it would revalue, or inflation would raise NOMINAL prices which with a fixed rate currency, translates into REAL increases. That in turn will translate back into higher real wages (in global terms, as in workers presumably will share in the appreciation in goods prices).”

    I was wondering, then, if the combination of stagnant wages and strong inflation has decreased the purchasing power of the Chinese manufacturing worker? Do you have any other comments on this?

  20. langyan on said:

    See also In the Eye of the Storm: Updating the Economics of Global Turbulence, an Introduction to Robert Brenner’s Update by R. Taggart Murphy (with a mention of Hung’s article).

  21. Ho-fung Hung on said:

    paper mac and lanyan: the inflation question in China is an interesting one. I looked at the CPI data on the eve of the crisis in 2008 and found that what appeared to be escalating inflation in China in 2006-07 is in fact inflation in food and housing-related items (rent and housing facilities), while manufactured items were seeing *deflation* or sluggish price growth (see my article in Review of international political economy vol 15 no 2, table 2). It is a contradictory process as China has been facing, and more so under the stimulus, both surging liquidity (that brings inflation) and surging overcapacity (that brings deflation), the combined result in 2006-07 was the uneven inflation as mentioned. I expect the same thing will happen (but with larger extremity) in 2010-11. Interesting to note that the closing statement of the economic conference has dropped the emphasis on fighting inflation as a key goal for next year: seems like the leaders are aware that China wouldn’t have across-the-board inflation with aggravating overcapacty. And your observation is right: inflation in non-manufactured items (food etc) and asset price inflation, coupled with wage stagnation, will only hurt ordinary people in China. but consumers in the global North won’t be hurt much as the inflation would not be spreading to manufactured goods so far as China is still plagued by industrial overcapacity.

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