https://geopoliticaleconomy.substack.com/p/truth-china-economy-debunking-western-myths

Mar 28, 2024

By Radhika Desai, Michael Hudson, and Mick Dunford

Political economists Radhika Desai and Michael Hudson are joined by Beijing-based scholar Mick Dunford to discuss China's economy and debunk Western media myths, addressing accusations that consumption is too low, fears of "Japanification", the role of exports, and the new Chinese growth strategy.

This is part 2 of their discussion. Part 1 is here: “What is China’s future? Economic decline, or the next industrial revolution?”

You can find more episodes of Geopolitical Economy Hour here.
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RADHIKA DESAI: Hello and welcome to the 25th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I'm Radhika Desai.

MICHAEL HUDSON: And I'm Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton, our videographer, Paul Graham, and our transcriber, Zach Weisser. Today we are going to take up where we left off last week on the subject of China's future. What is it to be? Economic decline, as frequently predicted by Western pundits? Or is China going to be launching the next industrial revolution?

And as last time, we have with us Professor Mick Dunford, Professor Emeritus of Geography at Sussex University, and now working at the Chinese Academy of Sciences. He keeps a close watch, among many other things, on China's economy. Welcome, Mick.

MICK DUNFORD: Thank you very much.

RADHIKA DESAI: As we pointed out last time, China's breakneck growth has not only aroused envy in the West, but also prompted the proliferation of doomsday predictions about China's economy. We are told that we are at "peak China", that China can only go downhill from here, that China's property bubble is about to burst and throw China into a morass of Japanification and secular stagnation, that China has been stealing technology all these years, and the stolen technology has been powering the growth. And now that President Biden is going to make it impossible for them to do so, that China will stop growing, that China has a serious unemployment crisis, that President Xi's authoritarian leadership is stifling growth by stifling innovation and entrepreneurship. China, of course, is involved in terrible things like debt-trap diplomacy vis-à-vis the rest of the world, etc., etc.

You know how it is. You've all seen the long list of accusations. And in the last show and this one, we are debunking these myths.

Now, we had organized our discussion around certain topics, which I will show you in a second. Here we go. So, we had organized, these were the topics. We discussed how to characterize China's economy, how to understand China's growth story. We took a closer look at China's COVID response. And then we had a really exhaustive and long discussion about the alleged property and debt bubble in China and whether it's going to lead to Japanification.

And we emphasized that for a number of reasons, including the fact that China has a very different growth structure, a very different financial sector, a far more effective industrial policy, etc., etc., that China was not in the least in danger of Japanification.

So, today, we want to take up the next four topics. We're going to be talking about whether China has a problem of restricted consumption and whether this is why China's growth is down and whether there are going to be stagnant living standards, of course, then affecting the legitimacy of the Communist Party's rule, etc.

We will then talk about the role of exports in China's growth story and how we may expect this to change, because there's a lot of myths around that as well. We are told that if China cannot export to the same extent, it will, of course, suffer from stagnation.

We will then more qualitatively discuss the main elements of what is China's new growth strategy. And finally, we will debunk some of the myths that surround China's international role, myths such as China is engaged in debt trap diplomacy, that it only wants to find employment for its surplus labor and markets for its surplus commodities and resources for its hungry industries.

So, that's what we plan to do today. So, why don't we just get going? Maybe we'll start with you, Mick. Do you think China has a restricted consumption problem?

MICK DUNFORD: Okay. I think the first thing to say is that China remains an upper middle income country. So, obviously, average levels of consumption are smaller than those in economically much, much richer countries.

Can you show the chart of consumption and investment?

So, if you look at this chart, which starts in 1950, you can see that over the course of time, the share of consumption expenditure in gross domestic product has declined. Household consumption in recent years has been in the region of about 38, 39 percent.

Early on, consumption levels were much higher when the country was much, much poorer. And as the share of consumption declined, the share of investment increased, which we shall speak about in a little while. I mean, the chart also plots net exports, and you can see that net exports have declined. And the share of GDP has declined. And the share of GDP has declined. And the chart also plots net exports, and you can see that net exports have declined somewhat in recent years.

But this decline in the share of household consumption expenditure has occurred as GDP has increased at astonishing rates. So, the actual real value of consumption in China has increased enormously over the course of time, and it continues to increase at this present point in time. So, it's a country, well, it has 400 million people who are in middle income categories. And so, partly because of that, it has an enormous market.

But I want, when people point [out] trends in consumption, I think it's quite important to think about the way in which China's recent poverty alleviation record has actually fundamentally transformed the consumption possibilities of very, very low-income people.

Can you show the chart, Radhika, please?

Ok, this is a map of what are called contiguous destitute areas. So, basically, 10, 15 years ago, almost all the poverty counties and all the poverty villages and most of the poverty households were actually concentrated in these largely mountainous rural areas. I won't point them all out, but you have the south of Xinjiang, you have virtually the whole of Tibet, you have Tibetan areas that are in four other provinces, you have the Wuling mountain area, almost all of them are mountain areas, Wuling mountain areas in four provinces.

Now, in these places, there were 80 million people whose income was less than $1.96 per day. It's important to say that rural Chinese people have important assets, because they have contracted land on which they can grow food, they have what is called a JGD on which they can build their own home, and they also grow their own food. So, cash income is not the only criterion by which you should judge the welfare of people who live in rural areas, but their cash incomes were very low and often depended upon the fact that people from these areas would go to work as migrant workers in other parts of China.

But, between 2013 and 2020, every single one of these people were lifted above the poverty line and often lifted well above it through an extraordinary program of poverty alleviation. So, this is one case where you saw massive increases in the consumption possibilities of the poorest people in China.

So, the idea, that China has a consumption problem, I find quite curious in the light of this extraordinary achievement. And the point is, this program has not ended, it continues. And so, the whole aim is, to move, as I say, in the direction of common prosperity, which means continuing to lift the income of these people so that they start to ultimately start to join middle income groups. And as they do, and as they spend, and obviously consumption will increase quite significantly in the years ahead, and it's one of the reasons why China has an opportunity to continue to grow for quite a considerable period of time.

RADHIKA DESAI: That's exactly it. And I'd like to point to another dimension of this by showing you this chart.

You know, Western complaints that China has a restricted consumption problem, that really what China needs to do is to increase the incomes of its, increase the consumption of its people, is really, according to many people, according to many scholars, it's really a way of, for Western countries to retard China's growth.

Because essentially, if you think about it, consumption plus investment is total GDP. So, if you increase the share of consumption, you're going to decrease the share of investment. And what it will do becomes very clear from this chart.

So, in this chart, we're looking at investment or gross fixed capital formation for China, and then for the UK, US, Japan, and the world. So, China is this red line here that you see, and the UK is this orange line, the United States is the blue line, and the world is this purple line.

And what you see here is that basically, and the chart goes from about 1960 to 2022, so you can see that China has grown essentially by increasing the share of investment in its GDP. And the slow growing country, so Japan for a while, of course, had a fairly high, although China's share of investment of GDP today is higher than what Japan's was in the heyday of Japan's growth at close to 40 percent. In China's case, it is above 40 percent, reaching in some cases to 45 percent. But what you see in the case of Japan as well is that Japan's share of investment to GDP began declining, and declined particularly markedly in the early 1990s. And today, it is kind of at the world average. It is higher than that in the United States and the UK, but it is at the world average.

So, these are essentially the slow-growing parts of the world economy, and they are characterized by a low rate of investment, which, in the case of the US, it is actually under 20 percent. In the case of the UK, it's actually under 15 percent. And it's no wonder that these economies are ailing. And the reason is simple. Investment is absolutely critical to expanding production, and also increasing productive efficiency. You always need an investment. And so, you increase productivity efficiency, you increase productivity, and therefore, you increase the capacity of people to increase their own material welfare, if you think about it, in terms of what it means on the ground. So, this is very, very important. And study after study has shown that in terms of—

Many factors affect growth. But if there is one factor, which is almost always emphasized as being critical for growth, you can't have growth without this, it is investment. So, this idea that China is suffering from lack of investment is ludicrous. Yes, the share of consumption versus investment is lower, but that is not incompatible with increasing levels of material welfare, which indeed China has been experiencing in the recent past.

MICHAEL HUDSON: Well, I think part of this investment consists of housing, and housing does not appear as part of consumption, because that's a balance sheet relationship, ownership. But to the extent that this capital formation takes the form of housing, that actually is consumption.

In the real world, if we look at consumption as, how you're living in a house, and you include having a house of your own as a part of consumption. So, actually, there's a direct correlation, feedback, and almost identity between capital formation and consumption in the form of residential housing.

RADHIKA DESAI: Mick, did you want to add anything?

MICK DUNFORD: Well, I mean, I just said, I mean, the point is that if you invest, you employ people, the people who are employed receive wages, those people will then use some of those wages in order to purchase goods and services. So, investment actually also gets translated into increased consumption.

And I can't remember the precise numbers, but there was a very interesting study done in Singapore, which actually showed that investment generates in industrial activities in particular, which is what China is actually targeting at this point in time. Investment in industrial activities generates far, far more jobs than does investment in services.

I mean, if you simply try to fuel a consumption boom, then to some extent, what you will fuel is a growth of services, which generally speaking, are very low productivity and do not generate the jobs that you will ultimately generate if you go down an investment path.

RADHIKA DESAI: And I think there's also a couple of other elements to this story before we leave it, maybe we should take a look at that. So, one of the reasons or one of the outcomes of China's consistently high rate of investment has been, of course, China's climbing share of world manufacturing. So, here you have China's gross output and value added in manufacturing versus NAFTA's and the UK's.

Mick, this is your chart, actually, maybe you want to speak to this.

MICK DUNFORD: Well, in a sense, it speaks for itself. I mean, it shows that China has actually come to account for an enormous share of industrial manufacturing "value-added".

I mean, in the United Nations Industrial Classification, there are 500 categories. China has a presence in every single one of those categories, and it leads the world in about 40% of them. So, it basically is the only country in the world that has a completely comprehensive industrial system. And that is very, very important, because that lays the foundations for industrial upgrading, because in a sense, it means that, I mean, obviously, there are a few critical sectors where China has certain gaps at this point in time. That means that China has this kind of comprehensive industrial system, which enables it, if you like, to generate a process of investment that will generate very strong growth internally within China.

RADHIKA DESAI: Indeed, in fact, what I'm reminded of as well in this case is the simple fact that China, as a result of these investments, has also acquired its technological lead. So, there was a recent report published by ASPI, which is the Australian Strategic Policy Institute, normally a terribly anti-China outfit, but this, and they are basically just playing Cassandra, of course, for the West.

But this report pointed out that China's global lead extends to 37 out of 44 technologies that ASPI is now tracking, that China is, and this covers important technological fields like defense, space, robotics, energy, environment, biotechnology, artificial intelligence, advanced materials, and quantum technology.

So, you can imagine that this idea that China should somehow decrease the proportion of its income it spends on investment and increase consumption is essentially a recipe for essentially restricting China's growth.

And then there are also a couple of other points I'd like to make, and this relates to exports, because, of course, exports is also part of what would be— exports plus investment plus consumption is total GDP. And so, here we have China. It is true that between about the 1990s and the mid-2000s, I would say that China's exports as a share of China's GDP went from a low of about 10% in the mid-1980s to a peak of over 40% in the late 2000s.

But since then, particularly since 2008, it has declined. And even though it has declined, China's growth rate remains substantially above the growth rate of the advanced countries. You know, China's exports as a share of GDP for China today is substantially lower than that for Germany, as you see, which remains quite dependent on exports, partly, of course, because of the existence of the EU.

And here's another chart that is also quite interesting.

Because this is kind of a nice segue into talking about China's growth strategy as well. Because what you see here, in fact, let me show another chart first. Mick, this is your chart. Maybe you start with this one, and then I'll show the other couple of charts.

MICK DUNFORD: Yes, well, I mean, this chart plots world GDP growth from the middle of the 1960s and also plots, well, actually from the early 1960s and from the middle of the 1960s, it plots world export growth. And what it shows very, very clearly is that one can say certainly up to the North Atlantic financial crisis, the growth rate of world exports, this is real growth, considerably exceeded the rate of growth of world GDP. And since then, the rate of growth of exports has slowed very, very significantly indeed, and generally speaking, only barely exceeds the rate of GDP growth.

In the case of China, this change in the global situation obviously is one of the reasons for China's somewhat slower growth, although as we've insisted, China's rate of growth is still consistent with its long term objectives in relation to increasing GDP by, and GDP per head by 2035.

China's exports grew at something like 18.1% per year up until the financial crisis over a period of nearly 30 years. That's quite astonishing. Then with the financial crisis, they dropped to 9.4%. And then since 2013, it's grown at 5.7%. So obviously Chinese exports are growing much less quickly. Because exports are growing less quickly, of course, many of the private sector firms that were export-oriented, have been reluctant to invest. And if they go to a bank asking for credit, it obviously is going to be more difficult to get credit unless they actually have a strategy, which is clearly designed to upgrade and move up the value chain.

So China, China's export, in a sense now contribute less. And that's one of the reasons why China is undergoing this current process of structural change. This is a process of structural change that, as I've said, is amongst other things designed to significantly upgrade existing industries, not to abandon them, basically to use new technologies in order to upgrade and improve the quality of these industries. So they continue to play an important role.

Although at the same time, because of the growth that we spoke about earlier in the size of China's domestic market, the domestic market, as we shall probably explain in more detail later, is going to be a significant focus of future growth.

MICHAEL HUDSON: This is probably going to continue. The interesting thing is to look at Germany, which was at the very top of the chart. We know that Germany's exports are not going to increase because of the sanctions against Russia, and also because of China's creation of its own automobile industry. It's not importing BMWs. BMW has moved its production to China. China is not importing chemicals from Germany because BASF has moved its chemical operations to China.

So you're having a movement of Germany into China, and much of the increase and the decrease in world trade relative to GDP, which means domestic self-reliance, is a result of China's role itself. These charts would be quite more emphasized if we had China on the one hand, and the rest of the world without China on the other. So you're having China's import displacement for much of this as it becomes more self-sufficient. This is sort of a model, not only for China, but for the whole Belt and Road Initiative that it's trying to put together to make them independent of the US and NATO countries, because the US and NATO countries have already said, we don't want more trade with China.

You're having the World Trade Organization really coming to an end. In today's Wall Street Journal, for instance, there's accusations that we've got to ban all Chinese exports because Brazil has brought an anti-dumping rule against China. Anti-dumping means the government is supporting development. Well, of course, the government's supporting development. Anti-dumping, you'd have to ban all American exports, especially agricultural exports, all Chinese exports. This is simply a legal means by the US controlled international diplomacy to isolate China.

But of course, the result is that it's isolating the NATO countries from what's becoming the whole Chinese sphere, that it's going to be independent in itself. And if you would do, say, the Eurasian sphere versus US-NATO, you'll have a very interesting contrast there. Very little, less and less trade between the world majority and the US-NATO, but much more domestic trade, which will not appear as trade at all because it's domestic.

RADHIKA DESAI: You know, absolutely. And I just wanted to share this chart once more, just make a couple of points about this.

You know, this whole, what you're looking at here is a quantitative story, but there is also a qualitative story hidden there. And Michael, you just referred to it, which is that, this peak of exports was really a peak, generally speaking, of trade among, on the one hand, the US and Western countries, and on the other hand, China. And to a lesser extent, some of the other BRICS, but that was the main story.

Now, after this dip, if and when world trade recovers, it will have a very different structure in which China remains central to the story. But increasingly, China's trade partners will be a rather different set of countries, precisely because, this dip, the dip of export of goods and services, okay, it's gone up a little bit here. But quite frankly, if Biden's strategy, foreign policy continues along its present path, which is causing conflict, expanding sanctions, etc., etc., and proliferating conflicts across a range of theatres, this is only going to essentially isolate the West and take it out of, as Michael, you were saying, out of the trading relationships of the world, and so on. So, this is a qualitative change that we are looking at. And I think, and that's one thing.

The second thing is, of course, that in, as far as the consumption story is concerned, actually, a good part of what China does not export, as Mick was saying, actually becomes part of the internal consumption of China. And as you'll see in a minute, China's new growth strategy directly involves the expansion of the consumption, in quantitative terms, not in proportional terms, but in absolute quantities, the expansion of the consumption of the Chinese people.

Because remember, at the time of 2008, when China's economy was delivered this short, sharp trade shock, China's economy turned, this giant economy turned on a dime. It said, okay, if we cannot have access to those export markets, first of all, we are going to engage in a massive investment drive. And so, the next two or three years, China engaged in a massive investment drive. And then as that came to an end, China has explicitly followed the policy of allowing wages to rise, so much so that many industries that relied on low wages are no longer economical and profitable in China anymore. And they are moving elsewhere, which is fine, which is as it should be, because China is expanding other more high productivity industries, as Mick and others have pointed out. So, that is the qualitative story.

And I just wanted to show you this chart as well, which only goes to about the mid-2010s, but I would say the story continues today.

What you see here is this red line shows China, gross exports as a share of gross output or GDP from 1995 to 2017. And you see that this is the developing countries excluding China, and this is China. So, first of all, compared to other developing countries, China's reliance on exports was considerably lower. And then what you also see is that it has actually been going down.

That is to say, China's growth, the market stimulus for China's growth is increasingly coming from China's own economy. And the same goes for the import of intermediate inputs. China is importing fewer intermediate inputs, which means that firms within China are increasingly producing the inputs that were previously being imported into China. So, in that sense, growth in China and also in the rest of the developing world, though to a lesser extent, is becoming less reliant on trade growth.

And this is a chart which I got from Richard Baldwin, one of his blogs.

And it also shows similar things. Export-linked manufacturing as a percentage of manufacturing. It peaked for China in about 2006, and then it has declined. And domestic sales of China's manufactured goods, it shows, is growing faster than export sales. You see here this blue line is domestic sales.

So, you can see that more and more of what China is producing is being produced and in many ways even preferred by China's citizens. So, this is a really welcome development. And as China moves to the forefront of technology in a range of fields, this will only increase because why would you buy a foreign item if it is technologically inferior to your domestically produced items? So, those are some of the things that I wanted to bring out.

MICK DUNFORD: Can I just, I mean, re-emphasize some of the very important points that Michael and you, Radhika, just made.

I mean, in that period up until the financial crisis, China had very large export. And it was basically exporting goods predominantly, as you said, to Europe and to the United States. But Europe and the United States, with the exception of Germany, were countries with huge trade deficits. So, this model was only sustainable insofar as trade surplus countries lent their surpluses to the richer countries in the world to enable them essentially to live beyond their means.

So, what's come to an end, or coming to an end, it seems, is that particular model.

But at the same time, it's important to recognize that China, even today, is the main trade partner of 140 countries in this world. But these countries are largely part of the Global South. So, they're countries that in the recent thirty— in the recent neoliberal era have actually grown relatively slowly. And that's one of the reasons for this relatively slow growth of world trade recently, which has come to depend more on them.

But I mean, if you look at China's trade, it's being reoriented significantly towards these countries. And if one puts in place a system of trade, which in a sense is win-win, then it's quite conceivable, as you said, that in the course of time, South-South trade is going to grow very substantially. And I mean, China has a very, very strong commitment, to the maintenance of an open world economy, and in the establishment of complementary relationships.

So, it's quite conceivable, as you said, that while you've seen greater growth of the domestic market, more emphasis on the domestic market, in the longer term, the export market will continue to, play a really very significant role in China's growth. But it will probably be much, much more connected with the development of other parts of the Global South.

RADHIKA DESAI: In fact, that reminds me of another point that I meant to make. And that is that, you wrote a very fine piece recently in, I forget the journal now, but, and I commented on that, you said that a large part of what's going on right now is that China's international policies, foreign policies, foreign economic policies are directed towards reshaping the international environment in a certain way, which allows it to continue what it calls globalization. And I'll come to that in a minute, to increase international trade linkages, in a positive way for mutual benefit, rather than to subject other countries to imperial subordination, etc.

So, in that sense, the Belt and Road Initiative, or the lending and investment policies and what have you, all of these ways are attempts to reshape the international environment.

And in this, by the way, in many ways, I would say that the West has given China a great gift by prosecuting its proxy war against Russia, because it has driven Russia into the arms of China in a more certain way. I mean, this was already happening, but it is now happening in an accelerated fashion.

And just think about it. China and Russia are two economies with such enormous complementarities that they can only get more and more increasingly integrated, because Russia has a small population and vast resources, and China has a large population and, well, China also has a lot of resources, but it can do with more resources. So, in that sense, energy and trade, that China-Russia energy and trade relationship has deepened massively over the last two years, and it will continue to do so.

And I also wanted to say that the same, Russia is doing the same thing. Russia, just yesterday, we had an International Manifesto Group webinar with key foreign policy experts from Russia talking about a new report entitled "Russia in the World Majority", or "Russia's policy towards the world majority", in which they point out that Russia is engaged in a massive reorientation of its foreign economic and political policies precisely in order to reshape the international environment in a way that is conducive to their growth.

And in both of these cases, unless the West really changes tack in a major way, it's going to get left out. And this re-formation of the international environment is going to reorient the world economy with China as its motor, Russia following along, and the rest of the world majority countries as well.

MICHAEL HUDSON: You've put your finger on the key, Radhika. I think President Biden, and before him, Donald Trump, have done a great service to the whole world. They've said countries have to be more self-sufficient for themselves. You can't depend on the United States because we may do things to hurt you. You've got to be self-sufficient. And I know that you're neoliberal, you want trade, but we're going to help you be more self-sufficient by imposing sanctions to really force you to defend yourself and to create the independence, because we know that you'll be much better off being self-sufficient.

And that altruistic sacrifice of U.S. trade and U.S. economy to help China and Russia, I think they deserve the peace prize.

RADHIKA DESAI: Quite right, exactly. The inadvertent peace prize.

Okay, so I think we've dealt with the whole issue of restricted consumption, stagnant living standards, investment, etc., and also the matter of exports and the role of exports in China's growth story.

So now perhaps we can talk about China's new growth strategy. And Mick, we know that you've been doing a lot of work on this, so perhaps you can start us off by talking about what you take to be China's growth strategy.

MICK DUNFORD: You know, I think the first thing to say is that, I mean, if you think about China, you know it's a country that in 1949 embarked on a transition to socialism. And, as it moved forward it encountered various problems, and as it encountered problems it introduced reforms to address those problems. And it's gone through a series of phases, you know.

In the early period it was basically embargoed by the United States until the early 1970s, and then it started to open up to the world. And then after about 2010 you had the pivot to Asia, and the United States started again to try to constrain China's growth. So that context has been particularly important in shaping China's development.

But, from reform and opening up it basically developed by entering the neoliberal world economy in a managed way. But in the course of that it encountered a lot of difficulties, in terms of the impact on the environment, the impact on inequality, the impact on corruption, and so on. And so it has seen aspects of its modernization process that do not really endear it to Western path to modernization.

So one of the really important things about what is happening in China now is that it is talking about a new path of modernization that is different from the path that was followed by the Western world, and it involves many dimensions.

Obviously it involves important emphasis upon productivity increasing technologies, and then the critical thing is, what drives growth is actually the diffusion of technology, the rapid diffusion of technology. And the rapid diffusion of technology depends on investment. So investment in a sense leads to rapid uptake of productivity increasing investment.

So obviously this technological upgrading is a critical part, and that relates also to the view that the previous drivers of China's growth are no longer. Well, either, they were associated with monopoly behavior or they were not associated with high productivity. So you had a low productivity, low wage export sector that needs to be upgraded. You had a platform economy that consumed vast amounts of capital, but because of the rents that are associated with monopoly positions, and you have the housing market, the real estate system, which we spoke about in the last discussion. Ctd....