China through the American prism

China’s economic and financial troubles over the last several months, combined with its growing weight on the international stage, make this country a sensitive focus point in the United States. The ongoing Presidential campaign has spurred all sorts of provocative anti-Beijing talk, both on the left and on the right. However, American officials take a more cautious view.

They are concerned above all about China’s uncertain long-term outlook. Its monumental move away from a more investment & export-driven economy toward a more consumption-driven model, and from a planned economy to a more market-oriented system, is nothing short of a tectonic shift and it comes with all the tensions and tribulations that go with it, along with an unpredictable outcome. This evolution is both thrilling and disorienting for Washington, which has little in the way of tools to influence it and therefore can only watch as it slowly unfolds.   

“I think the general view in Washington is that China will manage a decent growth rate in 2016, around 6%, and that a financial crisis on account of excessive debt is remote,” says Gary Clyde Hufbauer of the Peterson Institute for International Economics in Washington. “Most of the worry is geopolitical, not economic. On the economic front, the major concern is that reform will stall as a result of the current headwinds.”

Of course, the election season in the US has heightened the rhetoric over China. With voters and candidates absorbed by issues like income inequality and stagnant middle class incomes, Beijing has been in the crosshairs for how its behavior is perceived in the areas of free trade and monetary policy. The Republican front-runner Donald Trump is fond of saying that China, along with Mexico and Japan, “is killing us!” By that he means a combination of a few different things. Trump argues that cheaper labor costs in China and the open economy in the US have allowed the former to flood the latter with its goods. China has thus accumulated a huge trade surplus vis-à-vis the US while blowing millions of American jobs to the winds. All the while, China’s government has kept its market largely inaccessible to US firms. Finally, compounding the effect of these policies, Beijing has been artificially devaluing the national currency in order to make its products even more competitive.

These beliefs are widely shared across the electorate and among politicians in the US, both on the campaign trail and in Congress. Though he puts it in very different terms, this is in fact Bernie Sanders’ opinion too, in the Democratic camp. The Senator from Vermont prides himself of having always voted against trade deals with China. In today’s increasingly populist political climate, even Hillary Clinton, traditionally a supporter of free trade, is espousing a much more guarded approach. As for Congress, for some time now an unusual coalition of Republican and Democratic lawmakers has been trying to pass some sort of a measure to curb China’s alleged currency manipulation.

If American concerns over the economic relationship between the US and China are understandable to a certain degree, they also come with two important caveats: they are somewhat outdated, in the sense that at this point the damage from globalization to US jobs is done. “Here’s the part of the story that Trump — and other trade-skeptical politicians like Bernie Sanders — miss: The China trade shock is pretty much yesterday’s news,” writes James Pethokoukis of the conservative-leaning American Enterprise Institute in Washington.

Secondly, at least one piece of the puzzle is in fact being reversed as China gradually opens up to the world economy. Having tightly controlled it for decades, the Chinese central bank (the People’s Bank of China – PBoC) is now letting the value of the Yuan reflect the country’s financial and economic reality more accurately (though not completely). Additionally, during the wild foreign exchange swings of the last few months, the PBoC has intervened to prop its currency up, not to suppress it.

The truth is that, for the time being, neither a Chinese takeover of the US economy nor the imminent collapse of the Chinese economy is a particularly likely outcome. “The Administration and most (but not all) China experts think that China will manage,” says Hufbauer. “Owing to a new burst of tried-and-true remedies – infrastructure spending, fiscal deficits, easy bank credit for established private and state-owned firms.”  

Therefore, adds Hufbauer, if Wall Street is anxious about the fluctuations of the Yuan, US officials in Washington have more immediate concerns to occupy their minds: for example the economic and political chaos that is gripping Brazil, another former BRIC superstar that has now fallen into utter disrepair.

However, the worry about China is more of a long-term nature.  At stake is whether it will continue to simply muddle through or instead get its house in order for the sake of more sustainable growth going forward. “The big question is whether the government can broaden the safety net – health care, education, other public services – foster wage increases so that consumption picks up,” says Hufbauer. “And introduce economic reforms to allow more foreign competition in protected sectors of the economy – finance, telecoms, heavy industry.”

This is going to be no easy feat, considering the traditional economic outlook of China’s policymakers and today’s less stable global environment. “The reality is that for all of the country’s economic liberalization and progress over the past decade the government has still not entirely changed its approach to the free market,” Eswar Prasad of Cornell University in New York and of the liberal-leaning Brookings Institution in Washington DC wrote in the New York Times at the end of 2015. “China today represents a grand experiment in whether the tension between two contradictory forces — the free market and the government’s proclivity to do whatever it takes to maintain ‘stability and order’ — can be reconciled.”

Undoubtedly, China’s – and the world’s – new difficulties may cast a shadow on this project. Though the Chinese leadership has made a concerted effort toward reform in the last few years, it is possible that, as a result of the ongoing economic slowdown and market volatility, much like the US and Europe they may be tempted by a return to more interventionist policies, at least for a while. In any case, even if it remains committed to liberalizing its economy, this process will take years to unfurl, moving, as Praswad described in the Times, with “one step forward, two steps sideways”. This is certain to continue puzzling, and unnerving, observers in the United States.