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Economics for the 99% China on my Mind

By John Weeks.

[author of Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policyAnthem Press, $17)

As we approach the summer and the mainstream media finds it hard to fill the air time and the newspaper pages (hardcopy or web), we expect a seasonal increase in the incidence of nonsense.  We have not been disappointed, as shown by recent hoopla about how any day now the Chinese economy will surpass that of the United States in size (for example, in the reliably right-wing Economist).

In keeping with the frivolity of the topic, several commentators have bickered over measurement.  One went so far as to enlighten readers about using exchange rates to calculate versus a "purchasing power parity" measure (don't ask).  All this babble about who has the larger economy provokes angst amongst the ultra-nationalists - "our economy smaller?! - can't be and if it is it is the work of the Devil and his Liberal acolytes!"

If there any reason to care whether the Chinese economy, however measured, is larger than that of the United States?  The answer is, "yes", because of what the mainstream media dares not say - the current Chinese leadership is dedicated to making China the most powerful country in the world, economically and militarily.  And, it is not revealing a dark secret to tell you that China is well on its way to achieving that goal.

I go to the statistics before defending myself against the charge of "China bashing" (defined as unprincipled, unfounded and unjustified criticism of the Chinese regime and China in general).  The chart below shows that by the most common measure, prevailing exchange rates and constant prices, the US economy in 2012 was far larger than the Chinese, about $14 trillion compared to 4.5 trillion (statistics from World Development Indicators of the World Bank).

Take another look at the chart - in 2011 Chinese exporters overtook US exporters and now the world's most populous country is also the world's largest exporter, with slightly over 11% of world trade ($2.2 trillion).  Exports are the better gauge of a country's economic power for at least two reasons.  Above all else, they indicate the extent of influence and control in world markets.

 

China and the United States, Gross National Product (constant US$ of 2005) and Exports (current US$), 1990-2012 (billions)

 

Second, a trade surplus allows the capitalists in a country to finance ownership of property in other countries, either through direct investment or purchase of paper assets (stocks and bonds).  No country has become a great power without a long period with a trade surplus, and none has remained so without a surplus.  This is not good news for US capital, because the US trade balance has been negative for 35 consecutive years, now almost $500 billion (which, believe it or not, is a considerable improvement on the previous three years).

When exports are large enough to generate a trade surplus that allows a government either to acquire foreign assets or hold reserves of the currencies of other countries.  The capitalists and government in China do both, as the second chart shows.  In 1998 institutions public and private in China and the United States held about $150 billion in foreign exchange reserves.  Just 14 years later the Chinese total rose well above 3 trillion, and the US hoard a paltry 17% of the Chinese.  To this I should add that the vast majority of Chinese held foreign reserves is held in US dollars (mostly in the form of US government bonds).

 

Total Foreign Exchange Reserves, China and the United States, 1990-2012 (US$ billions)

 

If the export competition between the US and Chinese capital has been decided for the latter ("been there, done that"), the headline for military power is "up and coming".  The next chart shows that in 1990 Chinese military expenditure was not quite 3.5% of the US amount, and in 2012 had climbed to over 15%.  Well below the United States, but sufficient to make China far more of a military power than any of its neighbors.

There is a general rule about arms and great powers -- governments create military potential for the purpose of achieving their goals by threatening to use it, and carrying through on that threat when necessary.  The government of Vietnam recently encountered this harsh fact of international relations.  For years tensions have waxed and waned among the several countries of the region claiming the right to drill for oil and gas in the South China Sea.

Last week the Chinese government ended polite discussion by sending military ships to guard the construction of an oil rig about 200 kilometers off the coast of Vietnam.  Perhaps not wishing a replay of the border war of 1979 with China, the Vietnamese government decided that discretion is, as Falstaff famously said, the better part of valor (Henry IV, Part 1, Act 5).  Also capitalist and more than slightly authoritarian itself, Vietnam is playing out of its league in any conflict with China.

 

Chinese Military Expenditure as Percentage of US Military Expenditure, 1990-2012

 

However you interpret the conflict over control of the South China Sea, the behavior of the government of China leaves little doubt that the country is an imperialist power.  This is most obvious in its investments in Latin America to gain access to raw materials.  At the end of 2011 investments by Chinese private and public companies in Latin America reached $65 billion, plus $75 billion in loans (at commercial lending conditions), making Chinese capital the third largest source of foreign ownership in the region (more details here).

In Africa as elsewhere Chinese capital invests in extraction of raw materials.  As if to demonstrate that Americans are not the only ones who could be ugly abroad, a series of violations of local laws resulted in the Zambia government in 2013 revoking the licenses of the Chinese-owned Collum Mine.  In the most notorious offense, the manager of a Chinese mining company (himself Chinese) fired a shotgun at a group of striking workers as they walked the picket line (see The Guardian article, "Chinese Mining Companies in Zambia under Fire for Abusing Workers").

I have personal experience of the attitude of Chinese capital towards their African investments.  In 2008 the United Nations Development Program hired me to evaluate its financial support for the China Africa Business Forum (CABF).  In the pursuance of this task, I met with the leadership of this organization, a gathering held in the national headquarters of the Communist Party (which suggests that the adjective "communist" should be taken literally)..

Without going into unpleasant detail, I can testify that I did not encounter more explicit racism when I grew up in segregated Texas.  I suggested that as well as African companies learning from Chinese ones, Chinese companies in the tourist sector could learn quite a lot from companies in Kenya and South Africa.  My suggestion received round of laughter.

Percentage Distribution of Chinese Foreign Investment by Region, 2012

Source: UNCTAD.

 

This February while advising the Zambian central bank (Bank of Zambia or BoZ), I sat in on a public meeting in which local and foreign business representatives raised objections to a proposed measure to restrict capital flight.  The Chinese businessman present raised strong objections to the proposal, and specifically demanded the right to directly negotiate with the Ministry of Finance over the tax rate for his company.

This, of course, is the mechanism used by Google and Amazon throughout the world to raise its competitiveness vis-à-vis other companies, as well drive tax rates to rock-bottom.  Chinese capital has learned all the tricks of the old-school imperialists and invented some of its own, as befits a rising imperial power.

Left: Collum Mine in Zambia, where a Chinese                   Right: Work break in a factory in China.

manager shot and killed a striking worker.

 

China has the second largest economy.  Is Chinese capital shooting (perhaps literally) for number 1? For sure. Will it get the prize?  Bet on it, even at long odds.  Should you be glad or sad?  I go there in the next 99%'er.


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