A Conversation on China’s economy

ASPENIA With the decline of the US model, what is China planning now? Will they form a new mix, adopting what they still see as positive from the American model, or create an entirely

FU JUN Increasing productivity is China’s priority today. Nevertheless, despite general agreement on this priority, the country’s direction and focus has been lost: intellectual debate has been confusing. For example, all this talk about the “Beijing Consensus versus the Washington Consensus” is misleading. While Washington certainly deserves some credit for that consensus, it still only provides a general framework. China is unique and must necessarily design its own policies. A theoretical model has to be replicated over time and space to be accepted definitively as valid. But situations evolve, goals change, strategies are different. In the Chinese language, the term for “theoretical model” and “strategy” (as a pragmatic way of getting there) are one and the same. We are focused on how to get from A to B given real world conditions.

ROSEN For a while, we thought China was the perfect example of the Washington Consensus – its successful application outside Washington. This was certainly true as opposed to Latin America or Africa. Though politically nobody could say it, in truth, the Washington Consensus called for barriers to be reduced rather than using import substitution and other factors. The so-called Beijing Consensus was actually a term attributed to China’s plan from the outside, as an alternative model. Ideological debate only came back suddenly with the latest crisis; before then, any “consensus” had actually been hidden.

ASPENIA Does all this translate into truly different options and policies?

FU JUN I believe so, yes. In China, there are shadows of more conservative and more liberal forces, to be sure, but after a good period for the liberals, now the conservatives are back. This conservative revival takes the form of statism (SOEs, or state-owned enterprises). They had never actually disappeared, but nor had they been so central to decision-making.

ASPENIA Let us turn to the upcoming presidential elections in the United States. Is there bound to be a “China factor” in the campaign? And, if so, can America afford to antagonize China?

ROSEN Americans tend to be very uncomfortable with specifics, but with the idea of China, America is more at ease than are Europeans and others. China is confirming that economics and inertia are more relevant than ideology and culture, and this, in truth, resembles aspects of the American experience. As far as the political campaign is concerned, there will undoubtedly be debates about how best to bargain with Beijing, but the subtext that remains is that the rise of China is only natural: “China is playing our game”, Americans think. So, at least as long as the country does not drift off towards extreme nationalism, China will be accepted as a competitor. A highly competitive counterpart – even on an unstoppable growth curve – does not represent an existential threat.

FU JUN China’s level of understanding of US domestic politics has increased dramatically, so it is easier to manage delicate passages. This certain degree of sophistication, however, does not remove the risk that China’s diplomatic efforts adversely affect its own population. Interconnection is so deep that ordinary citizens are directly aware of leaders’ forays on to the international scene, and slogans can produce unintended effects. Elites are no longer in total control of the dynamics. Popular sentiments can get out of hand.

ASPENIA Europe is undergoing significant economic upheaval and the very euro is in dire straits. In the EU package to save its currency, what role, if any, can China play?

FU JUN Europe’s financial elite understands the reality of interdependence, but there is nevertheless a genuine fear of mistakes on China’s part. As far as China’s involvement is concerned, I foresee three types of investments: high value added, manufacturing, and resource-based. It is still too early for the first type of investment. For the second, however, the time is ripe. For the third, there are undoubtedly politically sensitive aspects to be taken into consideration – particularly as regards the energy sector – but management is easy. The key is to choose investments that make economic sense, and it remains very hard to make the right choices. Government-sponsored investment still tends to prevail, despite that being the least welcome kind.

In any case, diversification is certainly underway.

ROSEN Let us consider foreign reserves for a moment: between 800 and 1.2 trillion US dollars are held by China. Furthermore, Europe represents China’s largest trade surplus, so euros flow from Europe to China. In such a context, some investment is bound to happen. This is a fact: to recycle money into Europe is a necessity for China. Still, the question of “how much” remains an open one. The key here is for Beijing not to become a distraction for the Europeans, who must necessarily buckle down to solve their own problems. The Europeans face some hard choices, and they mustn’t hope for some foreign entity to ride in and save the day. The internal process is crucial, and the European Central Bank (as well as others) do understand this.

ASPENIA China seems to be attempting a rebalancing of its own, tending toward significantly increased domestic consumption. How does the country plan to follow this developmental path?

FU JUN To undertake such a plan through a purely state-led process would entail costs that are much too high, so the “landing” will not be totally soft. Still, neither will the landing be too hard, as the state can extract significant resources from society. China’s main problem here is institutional: for instance, China very successfully “marketized” commodities, but it did not “marketize” factors of production (labor, land, capital). Usually, the opposite happens. So, if political authorities keep these factors under their control, we are bound to see corruption and distortions. The state should not attempt to be rule-maker, referee and player. Also, while laborers are technically free to move, those peasant workers that attempt to make it in the city generally see their income depressed.

ROSEN In the short term, the Chinese government does enjoy some control over some factors (though Fu Jun is right – not so much over labor anymore). In the end, it’s a problem of supply and demand: and the government is deeply involved in demand. They should thus succeed in avoiding that hard landing Fu Jun was alluding to, but certainly there will be an efficiency cost for that over the longer term. As China moves up the productivity ladder, they will suffer for the lack of marketization in production processes.

Furthermore, China can no longer count on those demographic dividends: there are significant challenges here for the ruling class. The middle income trap may yet be sprung. I don’t see the government as quite ready to give up its authoritarian hold on the system yet remain a strong and reliable rule-maker and run a good legal system. China doesn’t seem ready for that.

ASPENIA Is there bound to be more social tension throughout this phase?

FU JUN A pervasive sense of relative deprivation is the main risk here, with widening gaps between the rich and the poor, especially. While this carries real political dangers everywhere, as the developed world is well aware, in China such disparities would be even worse, as the authorities would be held responsible.

ROSEN In fact, even in countries where there were no major income distribution gaps (Japan, Korea, Taiwan) there were major political disruptions when the relative economies underwent their transitions. Indeed, the Asian experience begs the question: can China check the power of its government without giving up the one party system? In China, at least, people are exceedingly aware of this dilemma.

FU JUN Justification for great wealth in China is still a very delicate issue. It is not easy to find a narrative of how China’s rich became super-rich. Most crucially, access to political power plays a critical role in any such narrative.

ROSEN It must be kept in mind that in some new sectors in China, there were no incumbents. In addition, while the super-rich are conservatively estimated at between 50 and 100 million right now, the key to steady development – anywhere, but certainly in China – lies with the upper middle class. China’s middle class represents a huge market. Capturing that market is what lights up the world’s manufacturers’ eyes.