Can China maintain growth during American recession
PAUL JAY: Welcome to The Real News Network. I’m Paul Jay in Washington, DC. A few days ago, President Obama was in China discussing US-Chinese relations, mostly about the current economic crisis, the size of the American debt, the exchange value of Chinese currency. And joining us now to make sense of all this is Minqi Li. Minqi is an assistant professor of political economy at the University of Utah. Thanks for joining us, Minqi.
MINQI LI: Thank you, Paul.
JAY: So talk a little bit about what are the points of contention, points of agreement between the United States and China. And what do you think President Obama and President Hu really talked about?
LI: Well, my understanding is that during the recent trip of Obama in China, they talk about the exchange rate between the US currency and the Chinese currency. And from the US point of view, China has has been undervaluing its currency; that has given the Chinese exporter an unfair advantage. And another issue they talk about has to do with to have this new climate pact, where US and China are going to collaborate on energy technologies. The third thing is, in addition to climate change and the exchange rate, they also talk about certain possible cooperation in geopolitical areas, like in Iran, Afghanistan, and in North Korea.
JAY: Okay. Well, let’s start with exchange rates. Now, certainly there’s a lot of American manufacturers and retailers—not the least of all would be Wal-Mart—who are very happy with low Chinese exchange rates, ’cause that means cheap Chinese labor, which has been fueling a lot of especially retail trade in the United States. So why does Obama want to do this exchange-rate change?
LI: Oh, that’s—I think what you said is very true. But, on the other hand, of course, many US manufacturers based in the US, and I guess to some extent organized labor, would like to see that the US exported goods would have become more competitive, and if Chinese currency could appreciate, and that might make Chinese goods more expensive, and so that the US would have some relative advantage.
JAY: Now, the US dollar has been going down the last few weeks. Has it been going down in relation to the yuan? And what is that relationship right now?
LI: Well, China used to peg the Chinese currency, the Chinese yuan, to the US dollar back to 2005. And since then, the Chinese currency appreciated. But at the beginning of the crisis, in the middle of 2008, the Chinese currency again pegged to the US dollar. And since then the US dollar has been depreciating against almost every other currency. So that basically means the Chinese currency has been depreciating with the US dollar together against every other currency, and so that means that will contribute to the widening of global imbalances between China and the rest of the world. But on the other hand, if the China jobs, they’re pegging to the US dollar now, and if the Chinese currency could appreciate too rapidly, that could also destabilize the global financial structure. So that is a very subtle business.
JAY: And can China sustain an appreciation of their currency? How bad is unemployment in China now? And how much worse might it get if the yuan were to appreciate?
LI: Well, it’s reported that during the current crisis about 40 million Chinese workers already lost job. And, of course, if there is a further appreciation of the Chinese currency, that will again hurt the Chinese export business, which is now about 15 percent down compared to a year ago. But on the other hand, the point is that because of the current US crisis, and China cannot expect that the US would depend on debt-financed consumption to lead the expansion of global economy like the situation before the crisis, so sooner or later, China will have to move from export-led model of growth towards one that is led by domestic demand, especially household consumption.
JAY: Now, if I were China, I would say to the United States, “You can’t sell me, you know, billions of dollars of your T-bills and bonds at one exchange rate, and then all of a sudden you want me to appreciate my currency, which means all my value of my holdings of your currency go down.” So China must say: “Well, why the heck should we? Why should we lend you money, and then you reverse the whole game on us?”
LI: Well, of course, the point is that China right now is still depending on the export markets, depending on export to the US. So in that way, that gives the US a little bit of leverage. But on the other hand, the US cannot expect to hold that leverage forever, because the US will not be able to return to the vigorous growth. That was what happened in the 1990s and the early 2000 based on the debt-financed consumption. And so, one way or the other, these imbalances will have to be corrected in the coming years. The problem is that right now China is still, not willing to abandon this export-led growth model. And so that may bring about a return of the global imbalances and paving the way for the next round of global crisis.
JAY: Now, an export-led model, in other words, is “let’s keep our labor cheap”, because—
LI: Very true. Very true.
JAY: —if you were going to have a model based on a more vibrant domestic economy, you’d have to have more sharing of the wealth in China and raise wages in China, which isn’t something that they don’t seem to be doing.
LI: Right. Right.
JAY: So if they’re going to keep the current status quo in China, which is—cheap labor is one of their primary export products, in reality—can the US come back as the market? Or are they going to be at an impasse here, where you have cheap labor over here, but no real consumption over there?
LI: Yeah, that’s a very big question, because before the crisis, the US economy was led by household consumption, which was in turn financed by the expansion of household debt. But now the households are going to increase savings, so you cannot expect consumption to lead the US economy. And on the other hand, the US economy cannot rely on gigantic federal government deficits forever. And right now the federal government deficit is on the order of about $1.3 trillion a year and more than 10 percent of GDP. That cannot be sustained forever.
JAY: Hang on. When you say that can’t be sustainable forever, there are a lot of economists that are saying that the American economy can go a lot further in terms of deficit, that there can be more stimulus, more printing of money, and that there almost is no end in sight for that because we’re in such a deflationary period right now. What do you make of that thesis?
LI: That could be true in the short run, maybe in the next one, two, or three years. But if the US continued to accumulate deficits and the debt, and after several years, the debt will be at much higher level. And also, if we do have some kind of global economic recovery, there would be a decline for the demand for the US Treasury bonds, and that might force the rise of interest rate in the US and therefore make the US debt situation much less sustainable.
JAY: Well, it does not look like anything is going to change in the United States in terms of higher wages. If anything, wages are going down the worse unemployment gets.
JAY: So then we will be heading, whether it’s two years or three years, towards this wall where you could say you can’t increase the deficit any further without vastly debasing the currency. Is this a debate going on in China? What I mean by that is: is there a point where China loses faith in the American economy? Or, on the other hand, are the two economies so enmeshed with each other, they’re both in the same boat?
LI: Well, the basic problem for the Chinese economy right now is that it seems the Chinese leadership cannot quite make up their mind—and on the one hand, they are still hoping that eventually the US will come back so they could again see a rapid increase of exports to the US; and on the other hand, they to some extent realize that this cannot go on forever, and so then you need to increase domestic consumption; but they don’t want to do the massive income redistribution required for that, so they are not sure how to sustain the expansion of domestic demand.
JAY: So to what extent is China debating, and when Obama meets with Chinese leaders, do they say to him, “We’re not sure whether we have faith in the long-term viability of your economy”? Do they say that? Or are they kind of so—in such a similar situation? I mean, a lot of people have suggested China’s kind of, to some extent, decoupling in this crisis. They’ve talked how GDP continues to grow in China and that maybe the Chinese economy’s not so dependent on the American market anymore.
LI: Well, right now China has come out of this crisis relatively well, sustaining a growth rate of 8 to 9 percent a year. But that is largely based on the massive increase in bank loans, and which in turn goes to infrastructure investment, and that, however, could lead to excess capacity in a few years. And also some of the investment goes to the real estate sector. So there are people who concerned about possible asset bubble in the real estate sector. So these are potential risks.
JAY: So you’re talking about government stimulus money. This is state or government stimulus money you’re talking about.
JAY: And to what extent is this growth dependent on that stimulus money? I mean, is it a case that when the stimulus money runs out, the economy starts to sputter, or not?
LI: Well, the latest statistics suggest that for the first three quarters of this year, about 95 percent of the growth is coming from fixed investment. And so if this fixed investment cannot be sustained, there will be real trouble.
JAY: I mean, can you imagine a world in the next five or ten years that simply adjusts to this situation, which is high, 10-15 percent unemployment in the United States, relatively low wages, not that much consumer debt? Because of the crisis on the finance side, people don’t want to lend, give credit, and the rest of the world kind of readjusts and moves on based on the domestic market in India and China and Europe. I mean, is this a real possibility, or is it all so intertwined right now it heads towards another global crisis?
LI: Of course, one possibility is that it will just head to another crisis. But if we think about relatively optimistic scenario—and in the US, we may have the consumers to increase saving. But on the other hand, because the government deficit cannot be sustained forever, the US and maybe Europe will suffer from stagnation, but not collapse, in the coming years. And on the other hand, if China will be able to sustain its growth through massive increase in investment, and so long as Chinese economy is growing rapidly, they will increase imports of machines and equipment from Japan, Europe; it will increase imports of raw materials, energy, from Latin America, from Middle East. So that may contribute to a relatively rapid growth in the global economy for some years. But the question is when China’s investment cannot be sustained because of excess capacity, and also if China’s rapid growth of energy demand cannot be met by the constrained world energy supply (especially there’s a concern about the world oil production may have peaked), and then that may lead to the next crisis.
JAY: But you could have, for a time, a situation where American capital decides, well, we can make so much money in Asia, we don’t have to worry so much about domestic purchasing power in the United States. I saw yesterday on television a documentary the other day about Wal-Mart, and it turns out Wal-Mart, within—I think it’s three or four years—expects to have as many stores in China as in the United States, not just producing in China, but selling into the Chinese market. They may actually surpass the number of stores in China than in the United States. I mean, you could have a situation where the American capital says, listen, we’ll make money where the expansion is, and—excuse my language—screw the American workers.
LI: Well, then, in that case, obviously, you will have a divergence of interest between the US corporations and the great majority of the US population, and that, unfortunately, will make a progressive change in the US even less likely.
JAY: Well, you could have a situation where American workers have to decide they’d better do something to defend themselves or they’re going to be in real trouble here.
LI: Right. Yeah.
JAY: Thanks very much for joining us, Minqi.
LI: Thank you very much.
JAY: And thank you for joining us on The Real News Network.
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