Not so fast: The contradictions in China’s capitalist rise

By Pete Dolack

Hand-wringing over China increasingly seems to be a preoccupation of mainstream journalism, popular culture and the world of politics. In the past two years, China has passed Japan to become the world’s second-largest economy and passed Germany to become the world’s biggest exporter. Speculation abounds on when China will be crowned the world’s largest economy.

Among other forms, the decline of the United States can take comical or satirical forms in novels, Rick Moody’s Four Fingers of Death and Gary Shteyngart’s Super Sad True Love Story being two recent, outstanding examples. The plot of both unfold against a backdrop of a rapidly decaying United States at the brink of bankruptcy as the Chinese contemplate cutting off all credit, the former novel contemplating the human costs of economic free-fall layered over an absurd military gambit to salvage imperial prerogatives and the latter deftly using satiric exaggeration to lampoon the consumer fetishism that passes for U.S. popular culture. Laughing at the precipice is, arguably, better than crying.

Contemplation of the end of U.S. dominance can of course take much deadlier forms, such as the Bush II administration’s invasion of Iraq — a desperate ploy to re-assert U.S. military supremacy, impose a neoliberal paradise for its corporations, provide an economic and military base for the U.S. to assert itself over the Middle East and secure energy resources. Administrations from Nixon to Clinton had, in some form, carried out policies designed to slow down the incremental but steady relative decline of U.S. power in relation to the rest of the world, but such policies were tossed aside last decade in a mad gamble to restore undisputed supremacy. That the Bush II gamble backfired spectacularly cannot be in reasonable dispute; plunging the country into debt, wasting resources on military adventure, inflicting an appalling scale of casualties and engendering increased international willingness to oppose U.S. initiatives has instead accelerated imperial decline.

I think this is one critical reason for why U.S. corporate elites and their allied thinkers and policymakers split between Bush epigone John McCain and Barack Obama instead of their usual pattern of heavily tilting toward the Republican Party — the election of Obama promised a return to working with the allies of the advanced capitalist world instead of go-it-alone bull-in-the-china-shop adventures. That does not necessarily mean a less aggressive foreign policy as bombing campaigns in Libya, Yemen and Pakistan attest, but it does mean a more targeted use of the military, more consultation and more spreading of the costs and responsibilities, and therefore leading to a reduced burden and less instability, which are good for business. Wall Street in particular prizes stability. Therefore, the business elites who back Obama more or less got what they expected — a cool, steady hand at the helm of empire in which broader considerations are taken into account rather than a cowboy mentality that benefitted only a small, politically favored segment of Corporate America.

The general pattern of a relative decline in U.S. hegemony remains outside the ability of any strategy to alter. No country could possibly maintain the dominant position enjoyed by the United States in the years following World War II. Europe and Japan were in ruins, most of the rest of the world undeveloped and the U.S. possessed an intact manufacturing base and the ability to export its products around the globe. Europe and Japan rebounded, many other countries developed — sometimes in spectacular fashion — and there was much more competition.

But until the rise of China, there was no perceived direct threat to U.S. centrality. No single European country, nor Japan, was big enough to push the U.S. off its position at the apex of the global economy, and the centrality of the dollar in the Bretton Woods system and in the current era of free-floating currencies has cemented that status. An economically integrated European Union is not up to the task, despite the wishes of its industrial and banker architects, because there are too many centrifugal forces tearing at its foundation.

But now there is a country that seemingly has the potential to unseat the United States. But can China actually do so? Is Shanghai going to replace New York as the world’s financial center?

Let’s not hold our breaths just yet — China is not nearly capable today of becoming the new capitalist center.

Size matters. In earlier times, the seat of a small republic such as Venice could be the leading financial center based on the strength of its trading networks. Once capitalism supplanted feudalism, however, the financial center was successively located within a larger federation that possessed both a strong navy and a significant fleet of merchant ships (Amsterdam); then within a sizeable and unified country with a large enough population to maintain a powerful navy and a physical presence throughout an empire (London); and finally within a continent-sized country that can project its economic and multi-dimensional military power around the world (New York). China does have a population four times larger than the U.S., but its military and economy are much too small.

As the capitalist sphere grows larger and the problems of increasing complexity become more difficult, the capabilities of the center must become greater. Moreover, a center must be able to apply the force that maintains capitalism. There is no conceivable defensive reason for the U.S. to maintain military bases in more than 120 countries or to spend about as much on its military as all other countries combined. Such an overseas presence is a function of the force that has always underlaid capitalism: forcing open countries to trade, invasions and coups d’etat to ensure compliant governments, violent repressions against restive foreign populations and armed strike-breaking at home. There is no country or bloc that can meaningfully challenge U.S. military might in the near future.

Amsterdam’s reign as the financial center was doomed once the United Provinces (a precursor to the Netherlands) was soundly defeated in naval battles by the British, although Amsterdam did remain a significant financial entrepôt for some time. By the start of the 20th century, the U.S. had become the world’s biggest economy, and when it emerged stronger from the world wars while Britain emerged weaker, the U.S. became the global hegemon, although London remains one of the world’s most important financial entrepôts. History, however, does not repeat itself in neat patterns.

The rise of Britain and then the United States rested on exporting manufactured products and protecting their domestic industries. But unlike China, both also relied on internal consumer demand and had large areas of the world into which their corporations could expand; rising employee wages could be tolerated because of the ability of profits to grow in an era of expansion. In an era of mature capitalism, China is dependent on taking market share from others.

Success in doing that, so far, has enabled extraordinary trade surpluses, but the fact that much of that surplus is parked in U.S. Treasury bonds illustrates that China is nowhere near displacing the United States. On the surface, it appears as an irony that borrowing costs for the U.S. government are stable, or even falling, during a protracted economic crisis that originated within U.S. borders. But the centrality of the dollar, and the sheer size of the U.S. economy, makes U.S. government debt as reliable a safe haven as exists. If the U.S. government goes down, pretty much the entire global capitalist system goes down.

Only a currency that is fully convertible and represents the most rock-solid government guarantee could replace the dollar, and neither is the case with the renminbi. China in 2012 is a developing country and believes it must protect its young industries, just as other countries did during their rise. The advantage that China has over other countries is that, because of its vast trade surplus, it can afford to spend huge sums of money intervening in foreign-exchange markets to keep the value of its currency low, giving its exports a continuing advantage.

Doing so is really not so sinister; many countries, among them Japan, Switzerland and the United States, intervene in the markets to reduce the value of their currencies. (Despite the continual insinuations in the corporate media that the Chinese Communist Party issues decrees and, voila!, the renminbi is cheap, it requires continual heavy spending in foreign-exchange markets. You would think more corporate-media business reporters would be familiar with the fact that the Bretton Woods system of fixed exchange rates ended nearly 40 years ago even if Republican Party congressional members aren’t.)

Both the Bush II and Obama administrations maintained policies aimed at a cheap dollar; Obama’s goal of doubling U.S. exports in five years would be impossible without a dollar valued low against other currencies, thereby making U.S. products more affordable overseas. Nonetheless, China does this at a larger scale than other countries and is too dependent on exporting cheap products to stop doing so.

The production of cheap products is dependent on ultra-low wages, and that brings us to the contradictions within China’s capitalist rise. China’s low wages are based on ruthless exploitation of its rural population, and even China does not have a limitless supply of peasants able to move to cities to work in sweatshops. And even China has limits to how much manufacturing capacity it can rationally use.

Democracy is a historical accident of capitalism, not a prerequisite or something somehow built in. The spaces and contradictions contained within the political systems created to stabilize the functioning of capitalism (including institutions to adjudicate conflicts among capitalists and mechanisms for selecting political leadership in the absence of an absolute monarchy or the continued ascendency of a static landed aristocracy) enabled working people to wrest some of that democracy for themselves. Authoritarian capitalism is a model that has built industrial or trading powerhouses on small scales: Singapore and South Korea come most readily to mind. China is unique in that it is using this model on a vastly larger scale, and to become a global superpower, not simply a regional player as the others. South Koreans eventually forced a democratic opening from below through organizing; it is an open question as to whether a similar pattern will emerge in China.

Regardless of any possible democratic opening, if Chinese can’t buy the products that are produced with new capacity, what good is this extra production? For China to re-orient itself to producing for internal consumption would mean having to allow dramatic growth in workers’ income. But doing so would mean ending foreign capital’s reason to move production to China. China could try to switch to high-end manufacturing — to some degree, it is trying to extend its mix of production to do just that — but it doesn’t have the capabilities of non-Chinese companies that are already making such products and it would have to compete by muscling out foreign competitors.

As their own populations become more restless, foreign governments would not be able to stand by and allow themselves to be swamped by cheap Chinese imports. Moreover, the internal demand for such high-end products is limited within China, so it would be right back to having to rely on exports; much of China’s demand for high-technology products comes from government infrastructure projects and there comes a time when such a high level of investment ceases to be prudent and becomes wasteful spending, as has happened to Japan.

Another way out for China is what it seems to be intent on doing — buying foreign companies and buying interests in foreign operations. Yet it seems to be doing this not for investment purposes but to guarantee supplies for its internal markets as it is increasingly unable to meet its own needs, especially in energy. The Chinese certainly have the capital reserves to pursue this strategy, thanks to their massive trade surpluses and the large profits of their state-owned enterprises, but at some point will appear to be throwing their weight around, engendering resistance. Right now, Western capitalists see a market of 1.3 billion people and dollar (and euro and pound) signs dancing in their heads if they can gain access to it. But we come back to the fact that the production that has been moved to China from the West and other East Asian countries is based on extremely low wages.

The Chinese Communist Party can continue to apply repression to keep wages low, but such policies directly contradict its historic Mao-based ideology, which rested on the now-shredded social safety net known as the “Iron Rice Bowl” — an achievement not lost to collective memory. If the endless drip of scattered local rebellions organizes enough to force competitive wages, Western capitalists would still want to sell their products in China, but would produce at least some of them elsewhere. At that point, could China continue to grow its economy eight to ten percent a year? It does not appear it could. Chinese industry could step in and build new capacity, or acquire the capacity that Western capitalists abandon, but the upward pressure on wages would undercut China’s ability to export cheaply, and without much increased internal demand China would have a glut of capacity that would face shuttering.

China has limits, as all countries do, and if social explosions happen on a massive scale, none of us knows what the outcome might be. The party continues to apply repression to keep a lid on dissent. How long can it do so? None of us knows the answer to that, either, although it is interesting that U.S. capitalists who have moved production to China have an interest in continued Chinese “communist” repression at the same time that Chinese “communists” are now the most fearsome capitalist competition. Rivals who cannot let go of each other: The U.S. needs China to buy its debt and China needs the U.S. as an export destination.

My friend Paul Gilman, an activist-historian who has spent many years studying China, has said to me during our correspondence on this topic that Taiwan and South Korea’s right-wing dictatorships had to invest in the countryside to keep peasants even with the urban proletariat in terms of living standards to prevent revolutionary outbreaks, and that partially explains why Taiwanese and Korean workers were able to force large rises in wages, to the point where neither country can be used as low-wage havens for multinational corporations. (The militancy of those working people also helped.)

Two numbers will illustrate these points: The percentage of China’s gross domestic product that is household consumption (that is, all the things that people buy for personal use from toothbrushes to automobiles) is an extraordinarily low 35 percent and wages for Chinese workers held steady for a quarter-century at approximately five percent of U.S. wages.*

Let’s put those two numbers into some context. Household consumption accounted for 51 percent of the Chinese economy in 1985. To put that in further perspective, household consumption in the United States today is 71 percent and in the largest economies of East Asia and Western Europe it is around 60 percent. At the same time, the wages of Chinese workers have drastically declined as a percentage of gross domestic product during the past fifteen years, while the composite profits of Chinese corporations, private and state-owned, have nearly doubled. And one final comparison: Wages in Japan, South Korea and Taiwan started at less than ten percent of U.S. wages but rose quickly in comparison to world standards.

And that in a nutshell explains why so many manufacturers have shifted so much production to China. And why all those corporations headquartered in the U.S. and elsewhere who manufacture in China do not want change to come to China any more than do China’s coastal corporate elites, who decisively influence policy within the Communist Party. (Maybe we can just call it the “Chinese Capitalist Party” and end the pretense.)

One manifestation of that party policy is heavily concentrating investment in coastal industry while neglecting the countryside. Hung Ho-fung, a sociology professor who writes frequently about China, in a New Left Review article pungently titled “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” reports that rural per capita income has never exceeded 40 percent of the urban level during the past two decades. China’s countryside is arguably overpopulated, but government-party policy induces the exodus that has maintained downward pressure on wages.

Following a wave of strikes in China last year, some factories were forced to raise wages by as much as 50 percent. The U.S. corporate press simultaneously marveled that Chinese workers had “suddenly” organized themselves and were “no longer docile” while also wringing their hands on behalf of capitalists that China might no longer be a reliable low-wage haven. No need to worry just yet — 50 percent added on to five percent means seven and a half percent of world standards. That seems to remain a good deal for capitalists. It would seem that the Chinese political leadership decided it was prudent to let restless workers vent some steam, win a real concession (in relative terms) and thereby boil off (for now) the possibility of an organized challenge coalescing.

Eventually, the surplus army of labor will dry up, and Chinese manufacturers will face the same situation that Taiwanese and South Korean manufacturers began facing in the 1990s. Wages will have to rise, sharply, to at a minimum be competitive with East Asian living standards, thereby reducing the level of exploitation to a point intolerable to Chinese capitalists, and even more intolerable to multinational corporations operating in China. The Chinese export model, however, may have trouble before the countryside empties out because of its dependence on suppressing internal living standards, continually growing external demand and maintaining its currency valued low. The specter of inflation also looms, and China is interminably showing signs of tapping the brakes.

Meanwhile, the world probably cannot absorb much more Chinese production — the deep economic malaise in Europe and North America shows no signs of relenting, and may get worse. China has no choice but to create internal demand. But Chinese capitalists/Communist Party functionaries are getting rich on the current export model, and in a one-party system there is a built-in resistance to change and a security apparatus that can be used to stifle internal dissent.

Then there is also the degradation of the Chinese environment, another looming check on Chinese expansion. And, finally, one more element to think about: Can capitalism survive hundreds of millions of Chinese dramatically raising their material standards? This question may seem counter-intuitive, as conventional capitalist wisdom assumes that more is better, implicitly assuming a bigger market means bigger profits.

Expanding markets has been a critical factor in rising Western living standards in the past. But what happens when there are no more markets to conquer, and, more directly pertinent here, are there enough raw materials and energy to support China — or China and India — reaching the material standards of the advanced capitalist countries?

One economist who believes that the size of China is resulting in irreconcilable contradictions is Minqi Li. In his book The Rise of China and the Demise of the Capitalist World Economy, Professor Li argues that future demands by Chinese workers to raise their living standards will put catastrophic pressure on the rest of the world: Either the size of China’s labor market will force living standards down in other developing countries to China’s low level, causing vast unrest in those countries, or Chinese living standards do rise but in doing so reduce what is available for the rest of the world, driving down living standards and reducing the availability of resources elsewhere to intolerable levels. Moreover, Professor Li argues, there will not be enough energy available for the projected global demand before 2035 if the demand continues to increase at current rates.

Too pessimistic? Sorry, I have no happy ending to offer. Capitalism is a system that requires continual expansion: Expand or die is its remorseless law. Capitalism has in the past escaped depressions through expansion to new places. But there is almost nowhere else in which to expand. In the present crisis, private enterprises and governments continue to reduce workforces and cut wages and benefits. The products that are made cannot be sold because there is not enough income for working people to buy them; weak demand necessitates more cuts or moving more production to a new low-wage haven.

The world is in a vicious circle and there is no easy way out. Or no way out, other than by a better economic system — and creating one will require a tremendous grassroots struggle.

* Statistics in this and the following paragraph from the World Bank; Xinhua; and Hung Ho-fung, “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” New Left Review, November-December 2009

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2 comments on “Not so fast: The contradictions in China’s capitalist rise

  1. Joel says:

    The book you are here reviewing starts out by converting the opressor/imperialist, oppressed/colonial and semi-imperialist/semi-colonial world into a class-neutralized “core”, “periphery” and “semiperiphery”. It would seem that the operant word, “core”, reflects a standpoint on which the author centers himself, hence the historic pessimism at the decline and instability of imperialist hegemoney (misspelling intention).

    Since World War II, imperialist U.S. hegemony has not experienced the rise of new competition externally, along with clouds gathering for explosive emergence rebellion and revolution internally. While nation states still divide the world, the two processes are intertwined and inseparable.

    It should be said at the outset that imperialism is inherently unstable, and that capitalism itself has a tendency to collapse under its own weight.

    China has the ability and apparently the will to develop and modernize its economy to make itself an industrial power second to none. Such industrialization is vital and necessary not only for the national might of the Chinese nation state, both absolutely and relative to others, but also ultimately to create the material basis for an abundant and plentiful standard of living for its people.

    Imbued by a determination to place faith in and reliance upon the working population, the Great Leap Forward attempted to develop and modernize China, as measured by labor produtivity, by extracting surplus produced by the labor of Chinese workers and peasants. But because of the initial backwardness of the population, little surplus could be produced, and even this little at the expense of exhausting and antagonizing the population. The Great Leap Forward ended in failure, some say to the extent of a famine, and was abandoned. On top of that, a conflict with the Soviet Union led to a cease in development aid from almost any outside source. The Great Proletatrian Cultural Revolution was partly an attempt to revive the idealistic sprit of the Great Leap Forward, and reliance on the energy and zeal of the working class and its social allies. It succeeded in igniting revolutionary struggle and organization globally, to a certain extent, but had little effect on material development of the economy.

    Starting with the defeat of U.S. imperialism in Vietnam, by the time of the 1968 Tet Offensive, it became clear that forceful expansion was no longer a viable perspective, and amidst the Sino-Soviet split, Presdent Nixon visited the still unrecognized China, and opened up a new perspective of developing and modernizing China based on enormous imperialist-produced surplus value, transferred throuh investments and then amplified by applying Chinese labor to whole industries exported from the West and imported into China, with the incentive of offering cheap labor and little environmental reguation, translating into enormous profits.

    Further, because the Chinese state is still a product of an unarguable proletarian revolution in 1949, Peking can currently tolerate capitalist relations for a time, then sweep them away when they become a brake on production. Also, as China becomes stronger and stronger, they will eventually be able to demand more satisfactory compensation from the investors, encourage labor organization and resistance, and to tax away or even outright expropriate the property.

    It went so far, that by the time Reagan left office, much of the manufactured goods sold in the U.S. were made in China, with payments and debts flowing into China’s treasury. The once almighty dollar is not ultimately and essentially worth the paper it is printed upon. Further, over a trillion of these dollars are now IOUs held by China. Whole retail empires like Wal-Mart have sprung up all the way to the top in the U.S. to manage the enormous turnaround.

    In the short run, the leading-edge role of China in U.S. megacorporate profitability makes war against China more unlikely. But in the long run, because of differences in the historically derived class natures of the U.S. imperialist state and the Chinese workers’ state, it is possible that a catastrophic conflict may break out, and further, could go nuclear, since a conventional invasion and occupation of China is hardly conceivable.

    U.S. imperialism, currently projects a chummy friendship with China, and this is reinforced when many media analysts cite this in inducing cynicism especially on the Left against China. But the ruling class and its media and rumor mills never cease in preparing public opinion for eventual war, and already harass China by promoting reactionary secessionist movements, such as that of the Tibet feudalists and the “East Turkestan” Muslims, and no end of “human rights” cases. Above all, the cynicism and general negativity and pessimism about China is directed at the conclusion that socialism and communism allegedly don’t work, so that as we regard the unbearable conditions developing under capitalism, it will be less likely that we do so from the standpoint of the solution – socialist revolution.

    While being honest about any shortcomings or misgivings in relation to China, it is important to combat the cynical propaganda and stress the accomplishments of China in improving the lives of hundreds of millions of people, and especially to combat it as the first stage of counterrevolutionary war by U.S. imperialism.

    • Joel, I am a bit confused here; it sounds to me that you are commenting on a later blog post, “Could the rise of China fatally de-stabilize capitalism?, a review of Minqi Li’s The Rise of China and the Demise of the Capitalist World Economy, rather than to the points I made in this particular post.

      Nonetheless, you raise interesting ideas, and I thank you for writing a serious, well thought-out response. I should say, however, that I disagree with the underlying assumption of your comment. That is, you believe that China has taken a temporary capitalist detour on the way to socialism, whereas I believe that all evidence points firmly to the fact that Chinese leaders have taken an irrevocable decision to become capitalists and become enmeshed in the world capitalist system. (Irrevocable, that is, until and if the Chinese people rise up and overthrow their capitalist system.)

      Although Nixon may have had the intent you describe, Mao certainly did not. The Chinese turn to capitalism came about only after Deng Xiaoping gained control of the Chinese Communist Party. I must reiterate that China’s rise is based on all the contradictions of sweatshop labor; China is far from becoming a leading industrial power no matter how big its notional GDP. China imports much of its machinery from Germany; in fact, China runs a trade deficit with Germany. Moreover, the current massive buildup of Chinese industry is built on the industry built up during the Mao era and is sustained by the remnants of the Mao-era rural land system.

      The Chinese sweatshop economy is based explicitly on destroying the considerable social safety net and guarantees of Mao-era China, and leaving in place a ruthless race to the bottom that benefits Western and Asia-Pacific multi-national corporations at least as much as the Chinese economic elite inside and outside the party.

      It is true that many Western capitalists are counting on growth in China to buoy demand when austerity is being imposed elsewhere, but Chinese wages that average about five percent of U.S. wages means that Chinese can not buy what they produce. If Chinese wages rise significantly, trans-national capital will move production, short-circuiting China’s “rise.” If Chinese wages continue to be stagnant, then world wages will be depressed, further hurting demand. The Chinese political leadership has every intention of stifling internal resistance and maintaining sweatshop profitability. I say again, we should call it the “Chinese Capitalist Party” and end the pretense.

      The Chinese Revolution did make the material lives of everyday people much better (in comparison to before 1949) during the Mao era, albeit at a huge cost deriving from the mistakes and chaos unleashed in the 1950s and 1960s. But living standards have declined sharply during the capitalist era, which is not surprising since the country is undergoing a “primitive accumulation of capital” of historic dimensions. But that is a capitalist accumulation for private capitalist profit, not for social gain. During the Mao era, the percentage of economic output contributed by household (consumer) spending was close to the 60 percent typical of an advanced capitalist economy; today it is an extremely low 33 percent. China’s boom is fueled in significant part by extraordinarily heavy government investment on infrastructure, which is not sustainable. Neither is China’s overall path, which former Prime Minister Wen Jiabao admitted. Interesting times are ahead.

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