Minqi Li: “If China wants to transform into an economic growth model sustained by domestic demand, then it needs to first of all undertake some major redistribution of income and wealth, and I’m not sure the Chinese capitalist class is wise enough or could think through enough to undertake that path.”
PAUL JAY: Welcome back to the next segment of our interview with Professor Minqi Li. We’re talking about winners and losers in the new China. Welcome, Professor Minqi.
MINQI LI: Thanks.
JAY: China owns something like 1.3, 1.4 trillion US dollars. Much of that is debt. Some of it, I guess, is just receipts for Chinese goods sold in the United States. One way or the other, the two economies are in a rather dependent position to each other. At the same time, they’re contending with each other as powers around the world for markets and raw materials. Talk a little bit about this relationship.
LI: Well, exactly. But the US in recent years has been running very large current account deficits, and right now about $700 billion a year. And that partly reflect the fact that, basically since the 1990s, the US economy has been sustained first of all by the stock market bubble, then by the housing market bubble, and both has played a role in sustaining the debt-financed consumption, which is the primary factor behind the US economy. And China on the other hand has played a key role in supporting the US current account deficits. China runs every year basically about $200 billion of traded surpluses against the US. And China then invests most of that back into the US-dollar assets. And that in fact is meaning that China’s lending to the US every year about $200 billion. And so that is a big part in financing the US current-account deficit, allowing the US to support its debt-financed consumption. But now we all know that US can no longer sustain this debt-financed consumption anymore.The US housing bubble has burst, and the US economy right now is entering into a recession. The Eurasia economy is also entering into a recession. The latest news is that the second-quarter GDP of the Eurasia economy is negative, negative growth. And so with both the US market, the Eurasia market, and also the British market, with the European market in trouble, in the coming years China will have growing difficulty to support its export-led growth. And over the past decade, China has been very successful with this export-led model. But in the coming years, China will have growing difficulty. Moreover, with this peak oil, and China will also have growing difficulty to support its rapid expansion of energy consumption. So I would say probably beyond 2015 China will have increasing economic difficulty, and China may have to accept much lower economic growth rate. Until now China has counted on this economic growth to avoid major social problems, to offset the negative consequences from the rising inequality. And if China’s economic growth slows down dramatically beyond 2015, that might pave the way for some kind of social explosion.
JAY: What might this look like?
LI: That you have to speculate. You know, if China’s economic growth slows down dramatically, and that will simply mean this rising inequality will then translate into direct hardship for the majority of the Chinese population. Then we could first of all foresee many massive mass incidents like what we saw in the Guizhou province, the Weng’an incident, and that in turn combined with various tendencies of political dissidence. And, yes, it’s very difficult to predict, but if that happens, and since China in recent years has become a major pillar for the global capitalist economy, that would also be very bad news for the global capitalism as well.
JAY: So if the United States sinks into a very profound recession, the effects on China could have even bigger vibrations.
LI: Definitely, although I would say that in the coming years China should be able to maintain relatively rapid growth, because China still has got these huge foreign exchange reserves, and China still has got this huge fiscal surplus, and so it has room to use policy—.
JAY: But can the Chinese domestic purchasing power, domestic market, is there enough strength there to pick up for what it might lose if the American economy or Western economies go into a deeper recession?
LI: Well, there are two problems with this solution. If China want to transform into an economic growth model sustained by domestic demand, then it needs to first of all undertake some major redistribution of income and wealth, and I’m not sure the Chinese capitalist class is wise enough or could think through enough to undertake that path. And the second problem is that in addition to the problem on the demand side, and potentially—that’s why I’m saying beyond 2015—you also have this problem with the peak oil, the global oil production. By 2015 the peak oil, I think, probably will be very apparent. And China depends on coal for 70 percent of its energy demand, that beyond 2015 you would expect there will be very strong international pressure on China to reduce their greenhouse gas emissions, therefore very strong pressure to reduce coal consumption. And so, you know, it’s difficult to see, with that rapid growth of coal, how China could sustain its rapid economic growth.
JAY: Thank you very much for joining us, Minqi.
LI: Thank you very much.