In Shanghai

Another opportunity to decompress psychologically from the Land of Caged Toddlers brings me to Shanghai for an academic conference.  I was last here two years ago.

Heatwaves seem to be following me around the world this summer.  First Texas, then London a couple of weeks ago, and now Shanghai.  The day I arrived The Guardian published a photo gallery headed “Shanghai’s normally bustling Nanjing East Road has turned into an open-air bedroom on recent nights as local residents try to beat the heat of their cramped homes by sleeping outside on benches or directly on the pavement”.

China’s relentless pace of modernization has slowed somewhat in recent years, but is still astonishing.

As our airport taxi took us to our hotel, the Maglev train from the international airport to central Shanghai, with a world-fastest operating speed of 431 kph/268 mph, literally blew past us.

One a previous visit, taking the train from Shanghai to Beijing, we crossed the longest bridge in the world (between Shanghai and Nanjing), measuring164.8 kms/102.4 mi) in length.

Such feats of engineering, impressive as they are, are only one of the multiple facets to contemporary China.

A key consideration for an economy that is still developing, as is the case with China’s, is the strategy used to promote growth.

Up until recently, the PRC has chosen an export-led development strategy, which has delivered decades of ferocious economic growth.

But this export-orientation has come at a price.

First, it required massive investment, and this investment has had significant debt as its corollary, with the consequence that China’s debt is now in danger of exceeding its debt-servicing capacity.

Debt-deleveraging has thus become a major objective of the Chinese government, and has been so since 2012.

The architecture of China’s financial sector hinges on a negotiation between a state regulatory framework and the banking system.

The bankers seek to avoid the perceived heavy hand of the regulators by finessing their operations in ways that escape regulatory scrutiny.  Where credit is concerned, the most common ploy is to show that credit growth is being reined-in by moving instruments of credit growth and their outcomes off the bankers’ balance sheets.

So it is not clear exactly how much China’s credit growth is being reined-in.

At the same time it is not clear how quickly the PRC’s debt-servicing capacity is being enhanced.

As the Beijing-based economist Michael Pettis has pointed out, the usual factors which enable GDP growth to reinforce debt-servicing capacity are not present in China.  To quote Pettis:

“Typically, analysts assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case. Local governments are expected to boost spending by whatever amount is needed to meet the country’s targets, whether or not it is productive. [In China] GDP growth is not the same as economic growth…  it is incorrect to think of China’s GDP growth as growth in China’s underlying economy (or in its debt-servicing capacity, or its productive capacity, or however else one prefers to think of GDP)”.

The Chinese economy is thus the theatre for a tussle between local governments (and the banks which lend to them)  who want high GDP growth, and the regulatory authorities who want to bring-down debt by reducing the credit expansion needed up to now to finance this formidable GDP growth.

So far it looks as though the forces wanting GDP growth per se with the accompanying debt are getting their way despite the government’s best efforts to reduce China’s debt burden.

In addition, as Pettis argues, the PRC’s actual annual GDP growth rate is about half the officially declared current GDP growth rate of over 6%.

The second price exacted by China’s export-led growth strategy has been the risks associated with the need to have other countries absorb China’s exports.

But how are these countries to pay for what they import from China?

They can pay either with their own surpluses (assuming they are in surplus) or else by becoming indebted in order to pay for these imports (the US being the classic instance of the latter)–  someone’s trade surplus is necessarily another country’s current account deficit.

Thirdly, exogenous geopolitical considerations can weigh disproportionately on a country’s export-driven economic strategy.  Any contraction in western demand for imports is likely to be reflected in a downturn for China’s exporters.

Of greatest current concern is Trump’s trade war, with its threat of higher tariffs on hundreds of billions of dollars of Chinese exports. The PRC’s main response has been to retaliate with counter-measures of its own, but this does not of itself address the risk now created for China’s exporters by Trump’s trade war.

The fourth drawback faced by China’s pursuit of an export-led model of economic development results from one of its main concomitants, namely, a reliance on the outsourcing undertaken by western multinationals.

These multinationals have located enterprises in China primarily because of its lower labour costs, but as China’s economy expands, some of the accompanying gains find their way into the pockets of China’s workers.

Higher wages for these workers translate into higher labour costs, thereby making China a less attractive proposition for the voracious multinationals, who will look to even lower wage-cost countries (Vietnam, Bangladesh, Indonesia, Myanmar) as alternatives to Chinas-based production.

The fifth pitfall faced by the PRC’s export-led economic strategy, is that its primary beneficiaries have been elites in the coastal export zones, to the detriment of the rural-agricultural sector. The latter sector has lagged behind economically.

The rural-urban economic disparity is a significant problem in the PRC, a situation that can be remedied only by breaking the power monopoly enjoyed by the coastal urban elites.

The sixth problematic feature of the export-focused model, despite its huge success so far, has been the suppression of internal markets and domestic consumer demand, as the bulk of China’s investment has been channelled into its export sectors.

The PRC has chosen to address these issues by seeking to develop internal markets and their associated patterns of consumption without damaging the export-driven base.

But this “rebalancing of the economy” is easier said than done.

The greatest challenge here is the above-mentioned need to break the grip on power held by the urban coastal elites.  Hardly any individuals and groups relinquish power voluntarily (duh!), and the Communist government may not want to rock this particular boat, owned and operated as it is by very well-resourced and well-connected individuals bent on protecting their own interests.

Another challenge for the government will be the wholesale reform of China’s finance system, so it can provide opportunities for the small investors needed to prime the economic pump in rural areas.

Big investors are not going to be attracted by the small-scale cooperative rural enterprises, catering to internal demand, desperately needed by the PRC if China’s economy is to be rebalanced.

The introduction of non-labour-intensive agribusiness models in rural China is absolutely unthinkable–  huge numbers of rural dwellers would face catastrophic unemployment and starvation.

So small-scale ventures, preferably cooperative, are therefore the alternative most likely to succeed in these areas.

The challenges and problems to be faced in any attempt to rebalance China’s economy are grave, but so far not completely intractable.  In large part this is because these difficulties are political and not sheerly economic.

Two considerations are germane here.

In capitalism the rule of value is universal, but its concrete embodiments are not, hence in Shanghai this rule has been expressed up to now through banking and finance, Guangzhou as exports, Hunan province as agriculture, Macau as casino revenue, Hong Kong as entrepôt trade, etc.

Different value embodiments carry with them different profit rates, different social relations, different ways of being positioned in the capitalist world system, and more or less different forms of local politics and struggle (in China’s case some looking back to the commune model, some not), and so forth.

All these express the antagonisms of capitalism, but their modalities of expression are different, and will be different yet again, and radically so, if the PRC succeeds in rebalancing its economy by emphasizing domestic markets and consumption.

Another considerationpertains tothe PRC’s state-form.

This state-form is something of an uncomfortable and unresolved amalgam incorporating elements of neoliberalism and party-driven dirigisme, as well as several other possibilities in between.

Hence the not yet finalized contest between the coastal Guangzhou (export-based and neoliberal) and interior Chongqing (domestic-based, with neoliberalism constrained by a strong social-welfare orientation) models of economic development.

The spearhead of the Chongqing model was the now disgraced Chongqing Communist Party chief Bo Xilai.

Bo, now serving a life-sentence for corruption and other crimes, used his Chongqing tenure to conduct high-profile campaigns against organized crime (his detractors says this was Bo’s way of sidelining personal and political opponents).

Bo also incorporated Maoist elements in his social and economic agendas, by  reintroducing a communal dimension to Chongqing’s political and cultural life.  Those hostile to these agendas dismissed Bo as “little Mao”.

The highly ambitious and brash Bo was taken-down by the leadership of Hu Jintao and his Premier Wen Jiabao, to the consternation of China’s New Left, for whom Bo was something of a trailblazer for a “red” politics capable of taming neoliberalism.

Those on the China New Left I’ve spoken with over the years about Bo and his corruption invariably shrug their shoulders and say that while the corruption charges against him probably have some basis in truth, trials for corruption are the government’s preferred method for neutralizing opponents– “they all, Bo included, play this game”, I was usually told, “but at least Bo did something for the people”.

My interlocutors back up their comments by saying with a sigh or grimace that Wen Jiabao, who was most responsible for Bo’s downfall, has family members who amassed fabulous wealth in what seemed like a remarkably short time. The New York Times estimated that these family members controlled financial assets worth at least US$2.7 billion during Wen’s time as Premier.

So for now the Chongqing model seems to be in abeyance.

Having turned its back on the Chongqing model, in order to give Bo his comeuppance and also because it was “too red”, and wanting now to rebalance China’s economy in the direction of domestic markets and consumption, it will be interesting to see how the Communist Party goes about this undertaking.

Campaigns against corruption, a centrepiece of the current regime, as well as warnings to Chinese citizens about becoming too enamoured of “western values”, and ambitious exercises in “soft power” such as the massive Belt and Road Initiative (the BRI will create infrastructure corridors linking over 60 countries in Europe and Asia), will not cut the mustard for China’s less well-off rural dwellers.

Now will injunctions for intellectuals to be “patriotic”.

I spent a lot of time with intellectuals here, and they responded to this last exhortation with some cynicism.  What were they to do to show their “patriotism”?

Insert a little bit of patriotic flummery here and there in their writings? Make fewer visits to foreign universities?   Avoid eating at McDonalds and KFC which are all over the big cities (not that they would patronize such establishments because like most of their western counterparts almost all the Chinese intellectuals I know regard the food there as crap)?

It is hard to resist the suspicion that any “economic rebalancing” undertaken by the Communist Party will be piecemeal so as not to antagonize the powerful coastal elites.

The PRC has 56 ethnicities, and ethnic unrest in China has a long history.  Such tensions exist not only between a particular ethnic group and the state, but also between ethnicities, including their religious affiliations.

There are two main Muslim groups in China–  the Uighurs and the Hui–  and there has long been animosity between them, their common religious affiliation notwithstanding.  The two groups worship separately.

There is a Hui Muslim minority in Tibet, which has been in conflict with Tibet’s Buddhist majority.

But by far the most serious of these conflicts in recent times has been the current one between the Muslim Uighurs in Xinjiang province and the Chinese state.

Although the government’s line is that the residents of Xinjiang are “living in peace and happiness”, according to The Guardian a UN panel said recently that “they received credible reports that one million ethnic Uighurs are held in what resembles a ‘massive internment camp that is shrouded in secrecy’”.

While it may be impossible to confirm such reports definitively, it is clear that China, ostensibly fearful of Islamist radicalization in areas with Uighur Muslim populations, has taken draconian steps to tighten its control over Xinjiang province.

“Arab” influences in Uighur mosques have been a particular target.

Exactly the same target exists with regard to mosques in the west, so western Sinophobes, whose hypocrisy is legion, should tread carefully here.

The Belt and Road Initiative, if completed, is likely to have a huge economic impact on China’s far western provinces such as Xinjiang, so the motivation underlying the BRI is not only the PRC’s attempt to establish its position as a supra-regional hegemon, but also to use economic development and its accompanying prosperity as an instrument of pacification in areas with unrest.

The iron fist in a velvet glove–  western governments have of course known all about this stratagem for centuries (if not more) when dealing with their unruly subaltern subjects.


Kenneth Surin teaches at Duke University, North Carolina.  He lives in Blacksburg, Virginia.