Let’s begin by considering how bad things could get, for China and those it influences. The clearest approach I’ve heard to this question comes from Michael Pettis, the Beijing-based finance professor whose side business as a rock-music impresario I described in the March Atlantic. To think about China’s predicament in the late 2000s, he says, you should think about America’s in the 1920s.
Through the early 1900s, the United States played a role in the world economy surprisingly similar to China’s in recent years. Until the start of World War I, the United States had long been a “net debtor” country. It had relied on foreign loans and investments to build the factories and lay the railroads that ultimately made it an industrial titan. By the end of World War I, it had become a “net creditor,” as its undamaged industrial base supplied European combatants and the former customers of ruined European companies.
In the 1920s, its farms and industries made America the workshop of the world. It ran trade surpluses with most other economies, which meant that a disproportionate share of the world’s jobs were in America (it was doing work that other people consumed), and a disproportionate share of what it made went for other people’s use. Foreigners paid the difference by transferring gold reserves—John Maynard Keynes complained at the time that the United States was amassing “all the bullion in the world”—or taking on loans and investments from Americans. So far, this is like China’s story. And so far, so good.
This very role as global exporter made the United States unusually vulnerable when global demand collapsed in the 1930s. Having had more than its “fair” share of the world’s jobs to begin with, America had more of them to lose. This doesn’t mean that Americans suffered more deeply than Europeans. We got Franklin Roosevelt; they got Hitler, Stalin, Franco, and Mussolini. But as a matter of plain economics, the layoffs and unemployment of the Depression years were worse in the United States.
That is the problem for China now. Many Americans would assume that China’s recent history of trade surpluses would be its bulwark during a recession. In the long run, it will be, because it has provided a $2 trillion war chest in foreign holdings. But in the short run, China’s reliance on foreign customers turns out to be a serious vulnerability.
Pettis wrote recently that China’s worldwide trade surplus, “the cleanest measure of overcapacity”—factories that are running and workers who are employed only because of foreign customers—is by one measure at least as large as America’s was in 1929. China today, like America then, has a trade surplus equal to about 0.5 percent of global economic output. But as a proportion of its own economic output, China’s trade surplus is much bigger than America’s was. In proportional terms, today’s China is five times as reliant on foreign customers to create domestic jobs as America was in 1929. So unless China can find a way to keep selling when its customers have stopped buying, it will face a proportionately greater employment shock.
That China might indeed try to keep selling is the concluding part of Pettis’s cautionary analogy to the Depression era. As stock markets crashed and economies collapsed, the U.S. trade surplus nearly disappeared. American businesses, desperate to preserve markets and jobs, lobbied for passage of the infamous Smoot-Hawley Tariff, which increased duties on a list of some 20,000 imported goods. Soon afterward, other countries retaliated with similar tariffs; world trade dried up, and the Great Depression was on. When people use the words “Smoot-Hawley” today, they usually mean them as a warning that any interference with trade, especially by the United States, could again prove disastrous.
Pettis’s point is different, and in a way more worrisome. The real damage of Smoot-Hawley, he says, was less economic than political. Other countries understood that the United States was trying to protect its trade surplus and therefore its workforce. They didn’t like it as a political matter, and they struck back.
If that were to happen again, would it be because of “Buy American” provisions or other forms of American “protectionism” editorial pages so often warn against? That’s the wrong thing to worry about, according to this logic. The real counterpart to Smoot-Hawley would be Chinese protectionism—or rather, any effort by China to defend its huge trade surpluses, as the U.S. once did. China’s government is unlikely to rely on outright Smoot-Hawley–style tariffs. Instead it could increase subsidies to exporters; it could try to push the RMB’s value back down, after three years of letting the currency rise; it could encourage manufacturers to restrain wages; it could impose indirect barriers to imports, as with its recent pressure on China’s airlines to cancel outstanding orders for Boeing and Airbus airplanes. By early this year, China’s government was in fact doing every one of these things. As a result its global trade surplus, instead of shrinking as expected when the world economy deteriorated, grew dramatically. Exports fell, but imports fell much more: in January, exports declined by 17 percent and imports by more than twice as much—by 43 percent. This is an economic problem for other countries. But it could be an even more serious political provocation, if China is seen as forcing its share of unemployment problems onto everyone else. And thus, to bring this scenario to a close, the best China can expect from today’s shocks might be unemployment rates higher than America’s in the ’30s. The worst would be for China to start a trade war that makes things even harder for itself.
China’s emergence as America’s financier has steadily increased its leverage over the United States. But in the short run—rather, for however long the current crisis lasts—the two countries really are codependent in a way neither fully anticipated. Early this year, Chinese officials began saying more and more bluntly what Gao Xiqing, who manages some $200 billion of Chinese holdings in the United States, conveyed artfully in an interview in our pages in December 2008: that if America wants to keep using China’s money, it had better put its economy back on track. It should be saving and investing more, borrowing and consuming less. At the Davos conference in January, Premier Wen Jiabao made the point by outright scolding America for dragging down everyone with its excesses.
Okay already! But the more Americans obey these orders, the worse things look for China in the short run, since American overconsumption is exactly what has kept those Chinese factories a-hum. Americans are in a similar bind with their complaints about China. U.S. officials want China to reduce its trade surplus—while also hoping that China’s financiers will keep buying U.S. Treasury notes and stocks in U.S. companies with the dollars they get from that very trade surplus. We can’t have it both ways. The Chinese can give us money, or they can give us back some jobs, but not both.
So America will keep looking for the bottom of its economic descent, while Chinese businesses and workers endure a severe blow—one China’s leaders can’t really change by lecturing Americans. Why do I think the Chinese have good reasons for hope?
One answer lies in the realm of straight economics. Some of the lost demand is sure to be picked up within China itself, thanks to a stimulus plan that, at some 4 trillion RMB (about $600 billion), is proportionately much larger than the one proposed by the Obama administration, because the Chinese economy is so much smaller than America’s. Yes, there are grounds for skepticism about the Chinese plan. Some of the total represents a new label for projects already approved or begun. Some of the 4 trillion RMB is supposed to come not from the central government but from local and provincial authorities, who have no obvious way to raise it during a recession. Although one important element will be basic health-care coverage for average Chinese citizens, most of the money will be spent on construction projects, especially for transportation and infrastructure: more highways, an expanded high-speed railroad system, scores of new airports all across the country. Construction is the Chinese government’s first response to most problems—if it is worried that its universities are weak by international standards, it approves a plan to build new research centers—and the construction projects are subject to insider deals and kickbacks like those in most of the world. But laying concrete and raising girders employs a lot of people, especially the way those tasks are done in China, so this will be an option for some of the migrant workers now being sent home from factories.
Heaped on my desk are other sector-by-sector analyses suggesting that the rebound may come more quickly than the gross-demand figures indicate. “When can we expect to see signs of life in the mainland economy?” asked Andy Rothman, of CLSA Asia-Pacific Markets, in one such report, about the cement and steel industries. “Our answer is, March or April 2009,” when the first orders from the stimulus program will reach steel and cement companies.
As in America, real-estate values have fallen throughout China; but China’s bad-loan problem is nothing like America’s subprime-loan disaster. America’s banks have too little money. China’s have a lot, and the main reason they have not been lending is that until very recently the government was more worried about inflation than anything else. “Chinese banks are not only very liquid, they will lend when directed by the Party, which appoints all senior bankers,” Rothman wrote. They are being so directed now.
I have a lot more reports from a lot more sectors, but all lead toward the same conclusion: China’s economy may suffer more than most others, but it also has more tools and resources in reserve than most others.
Beyond straight economics, the “China is over” hypothesis seems to miss important cultural and political realities. Its unspoken premise is that average Chinese people just barely tolerate the social bargain the government now offers—limited freedom, potentially unlimited wealth. So if the regime ever falls short on its material promises, the deal will be off and people will rebel.
This does not square with what I have seen. I have often wondered why so many people in different roles and regions in China seem vivid. The answer has to be more than contrast with my own blandness. I think it is because being in China today is like being in Western Europe in the 1950s. No one’s family story is dull or uneventful. People doing routine jobs have been through great hardships and dramatic swings of fate. Last year I interviewed a party official in Shanxi province who was laying out his regional-development plans. Every 10 or 15 minutes, he would stop and say (through an interpreter), “Do you understand? If it had not been for Deng Xiaoping, I would be behind an ox in a field right now. I would not be sitting here wearing a necktie and talking to a foreigner.” Or, “Do you understand how different this is? My mother has bound feet!” A scholar I know in Beijing once offhandedly remarked that he had developed self-confidence when learning that he could survive for four years as a teenager on a labor gang during the Cultural Revolution. People in their teens and 20s were not on the labor gangs—kids today!—but they have heard the stories.
Layoffs and stagnant wages? People have seen worse. Last summer my wife and I went through villages in Sichuan province where refugees from earthquakes prepared for the next few years of residence in temporary shelters and tents. Laid-off migrant workers are returning to many of these same villages now. This is terribly hard, but in the same villages, grandparents remember when half the local population starved to death during the famines of Mao’s disastrous “Great Leap Forward” in the 1950s.
When my wife and I first visited China in the mid-1980s, most people with paying jobs toiled in big, primitive, inefficient factories for the so-called state-owned enterprises, or SOEs. In one unheated, acres-wide factory in Hangzhou, we saw some 5,000 women attending old-fashioned looms to make hangings and tapestries of traditional Chinese scenes, with no indication that anyone ever bought them. Some SOEs persist—most of the very biggest companies in China, from the oil and telecom firms to the major airlines, are their spin-offs or descendants. But when Deng Xiaoping’s economic reforms began in earnest in the 1990s, the most wasteful SOEs were closed down—eliminating many tens of millions of jobs in just a few years. Chinese social-realist novels set in the 1990s are about people laid off from the SOEs. Those set in the 2000s are about migrant workers—or urban professionals. The SOE recession was a major social strain, but it did not come close to bringing the government down. The Chinese people weathered that downturn—and more significant, so did the system that rules the country. People in China are as demanding as anyone else, and expectations have risen. But it is hard to see why the hardships just ahead will be the ones the Chinese public finds intolerable or that push the system toward Soviet-style collapse.
Westerners who have not traveled in China might be surprised at how outspoken ordinary Chinese people can be. When cars or bicycles collide (often), the parties involved get out to yell at each other and at the cops, and plead their case to the gathering crowd. Workers complain about bosses who have cheated them. Residents complain about the landlord. In Western China my wife and I met families from villages that were being flooded by new dam projects. They showed us around the new quarters they’d been assigned, pointing out the cracks and defects and itemizing the ways it was worse than where they used to live. It all seems normal to an American.
But when people complain, it is usually about those crooked bosses, reporters, mayors, or bureaucrats—not about the system or its rulers. Principled protests against the system and its repression certainly do exist, as with the daring “Charter 08” petition for civil liberties signed by more than 300 intellectuals late last year. But that is not the norm. Ten years ago, when the Asian financial crisis drove China’s unemployment rate above 10 percent, demonstrations broke out across the country. “But the laid-off workers were almost always fighting for their rights—unemployment benefits that they believed were stolen by local officials—rather than fighting against the central government policies that led to the job loss,” Andy Rothman of CLSA wrote recently. Perhaps these workers are missing the big picture, but for now they generally act as if they expect the national system to protect them against lapses at the local level.