EN -- LARRY ROMANOFF -- China's Economic "Rebalancing" -- September 27, 2020

 

 

China's Economic "Rebalancing"

 

 By LARRY ROMANOFF – September 27, 2020

 

One category contained in the flood of US anti-China propaganda is the current emphasis on how China must 'rebalance' its economy to imitate that of the US, most particularly in the area of increased consumer demand. The Americans offer an unending stream of negative commentary informing us that China's program of capital investment in infrastructure, production, and social welfare is "unsustainable", that China must cease this travesty against capitalism and reorient its economy to immediately stop all further development and turn the population into wanton spendthrifts like the Americans. We are solemnly told, with appropriate biblical references from the high priests at AmCham, that an economy blessed by God must be driven by consumer spending instead of investment and that China can no longer be "addicted" to exports. So much nonsense in this story, it's difficult to know where to begin.

 

Let's first eliminate the foolishness about "unsustainable", which phrase has become so over-used that it no longer carries any meaning. The dictionary tells us that if something cannot last forever, it is unsustainable. No problem there, but not everything attempted by man is meant to be perpetual. If I am having dinner, my eating is a process which terminates on completion, and never intended as a permanent action. It is the same with China's economic development. The nation will, for many years yet, require additional investment in infrastructure, in advanced production facilities and in social services. Like all processes, this will not last indefinitely into the future but will progress until all national needs have been met, at which time the country's attention will be directed to other matters. If a country has insufficient electricity generation or telecom infrastructure, to label its investment in those areas as unsustainable is nonsense.

 

 The Americans, envious of China's rise and progress, want to derail further development by attempting to pressure China into abandoning further economic development, especially in infrastructure, and turn instead to consumption. But the entire argument is a fiction that will halt China's development at its current level and plant the country firmly in the jaws of a trap from which it might never escape. China's infrastructure investment will indeed slow with time, but investment in advanced production facilities should never cease. Consumer demand will no doubt one day assume a greater proportion of China's economy, but there is no reason to anticipate this will ever be as high as that in the US because the American economy is structurally unsound and headed for eventual collapse. The Americans are telling us that China can succeed only by emulating the same practices that are causing the US to fail.

 

We are told that China's manufacturing and exporting form too high a percentage of the nation's GDP, but on what law is this based? If China wants to permanently be the world's factory, why can it not do that? Germany has been the world's high-quality manufacturing base for at least the past 100 years with no signs of impending destruction so far, so why cannot Germany continue forever? After the end of the second world war, with most nations and their industrial capacity having been bombed to rubble, the US manufactured about 50% of all products made in the world, this manufacturing supremacy ceasing only from the introduction of neo-liberal economics that resulted in the evisceration of American industry for the sake of trillions in profits for the 1%. But being the world's largest manufacturer and being literally "addicted to exports" wasn't morally wrong for the Americans when they were doing it, so why is it wrong for China now? The US once had massive current-account surpluses, and it sure wasn't morally wrong for them then, so why is it morally wrong for China today? There was a time when Americans saved money rather than spending; it wasn't wrong for them then, so why is it morally wrong for the Chinese to save money today? The US position, in its entirety, is hypocrisy, a deranged display of self-interest and greed cloaked in the Americans' infuriating brand of moral superiority. The pressure on China to restructure its economy is designed only to help American firms cannibalise and plunder China as they have done to virtually every other nation. The forceful push to dramatically raise consumer demand as a percentage of GDP is there only because the Americans hope to flood China with their products. There cannot be anyone in the world so naive or foolish as to believe the Americans would push China to increase domestic demand if only Chinese firms would benefit. There is nothing in the American position that would be to China's benefit and, just as with all the prior pressure on the RMB, would serve only to derail China's progress, kill the country's development, and leave the Americans supreme in their dream of world domination.

 

There is little evidence that China has any need to rebalance its economy in the sense demanded by the Americans, to forsake investment and development and strive deliberately to increase domestic consumption to anywhere near the level existing in the US. It is the American economy that is strikingly unbalanced, badly in need of reform, and unsustainable. An economy that manufactures almost nothing but weapons, where domestic consumption forms almost 75% of the economy and financial services are 50% of its GDP, is operating on an economic philosophy that has disaster and collapse as its only outcome. There is nothing intrinsically wrong, morally or economically, with China's consumer demand at 35% of the economy. Each nation has its own culture and traditions and has a full right to continue them.

 

The American economy's 75% dependence on consumer spending is an artificial entity. It did not develop naturally, it did not occur because it is a universal value or represents the natural yearnings of all mankind, nor because it was the will of God, and certainly not because it made any economic sense. This artifice was created entirely by the American gods of marketing who were looking for improved ways to loot the nation's bank accounts and accelerate the already serious income disparity, and is based entirely on fabricated values that are unnatural to thinking human beings and do not exist in any other nation. The American capitalists and their marketers eventually penetrated the educational system to the point where Americans are taught virtually from birth to borrow and spend, yet today they present this shaky artificial construction as the natural order of things, as the ideal economic state of advanced nations. It is no such thing. It is a dangerous and reckless condition that is both foolish and unsustainable.

Americans surpass the entire world in their amount of useless consumption, having long passed the point where it can be deemed pathological. As one measure, that of shopping mall space per capita, Germany has 2.7 sq ft per person, Japan has 3.9 and the UK has 5. For every American shopper there are 24 sq ft of mall.

 

The Chinese are not spendthrifts as are the Americans; why would this characteristic be promoted in China as a universal value to emulate? The Chinese traditionally save a much higher percentage of their incomes than do Americans. Why is this wrong? Why should China permit the Americans to bully it into encouraging useless consumption? The Americans are pushing for increased consumer demand in China, not from moral or philosophical superiority nor from good economic sense, but simply because US multinationals are salivating at the thought of emptying all those Chinese bank accounts. Why would the Chinese government participate in such a 'rebalancing' strategy against the welfare of its own citizens? It is not in any way good for China, but only for the Americans. One American wrote this comment:

 

"What is the source of the foolish statements that the health of the world economy depends on a consumer society? That's something only an American can write. The proposition that turning China into a nation of over-consumers will bail out economically mismanaged nations such as the United States is fallacious and insidiously misleading. So we broke capitalism and are expecting China to fix it by doing what we did to break it in the first place. That's good American thinking."

 

For unknown reasons, some economists refuse to accept that retail consumption is a result of economic growth, not a cause. Consumption of consumer goods and services is a natural outgrowth of economic progress and prosperity. It is the fundamental expansion of an economy that produces higher disposable incomes and greater retail spending. It cannot be any other way. An economy such as the US that is dependent for 75% of its life on consumer spending, is on its way to the Third World. 

For the past several decades China has managed its economic development not only appropriately but brilliantly, and has increasingly become a model to the world, giving light and hope to all undeveloped nations while the US presents a stark model of greed-induced self-destruction. Besides China, there is one other nation that has a sound economy today and has survived and thrived precisely because it has fiercely ignored US pressure and followed essentially the same economic, industrial and social path as China's. That nation is Germany. It has not deindustrialised, deregulated or financialised itself, but instead has maintained its well-trained workforce, manufacturing skills, its export volume, and its economic strength. The percentage of the German workforce in manufacturing is more than three times that of the US, with much higher wages and benefits. Not having financialised themselves, German companies can ignore the stock and bond markets and generate investment internally or by borrowing from banks. German firms function much more like China's SOEs than like US public firms in that shareholders, stock markets, hedge funds and investment managers are largely irrelevant. As Harold Meyerson noted, because Germany practices a brand of capitalism in which employees and communities still matter, Germany has been able to subject itself to the same forces of globalization that faced the US, while maintaining incomes. Unlike the US, Germany invests heavily in education and training, with government protection for its skilled workforce. By contrast, the US model has by design destroyed its worker base and incomes for the sake of short-term profits for the top 1%.

Germany's largest employers are high-wage companies like Daimler, Volkswagen, BMW, Deutsche Telekom, Bayer, and Siemens. The three largest employers in the US today are low-wage, dead-end companies - Wal-Mart, KFC and McDonald's. What else do you need to know about the economic brilliance of the Americans?

Almost all of America's management, its economic policies, and its financial capitalism are toxic. They are toxic to America and the American people and they will be equally toxic to China, if China permits the Americans to infect the country with its so-called "best practices". These practices are deeply anti-social and lead only to the destruction of the public welfare of a nation as we are seeing with America today, and they will lead to the same result in China, benefiting only the wealthy few at the expense of the entire nation. American practices, if permitted to take root and spread, will destroy the economy and social fabric of China just as they have done in the US.

 

Some Americans still blindly persist in their conviction that China is merely on the road to Westernisation, but many others feel an existential threat to their political-capitalist religion when facing the prospect that China may progress very much farther and persist indefinitely while still remaining essentially Chinese and not Western. Americans particularly may have to face the fact that their system of so-called universal values is more a dysfunctional impediment than path to glory. Tom Malinowski, the Washington director of Human Rights Watch, said

 

"This is the first time in several decades that we have seen a great power that stands for and promotes an alternative vision of how states should relate to their people, and that poses a threat ..... to a whole set of values and norms that underpin the international system the United States helped build."

 

I discussed elsewhere the American conviction that no peoples or economies could succeed without adopting the full spectrum of American institutions and values, but all will be compelled to eventually admit that China's version of capitalism has proven far more successful - and human - than that practiced by the West. A few years ago, John Gray wrote a review in the New Statesman of Martin Jacques' book 'When China Rules the World' in which he made the point that China's detractors struggle mightily with "the awkward fact" that China's industrialisation, which is the largest in the history of the world, has been achieved entirely indigenously and was based on a rejection of Western values and advice. He tells us that the China skeptics ignore evidence that doesn't fit their world-view, and insist that China will inexplicably be compelled to Westernise at some point. He claims, and he is correct, that they overlook the fact that it is Western capitalist Neoliberalism that has collapsed, and not Chinese capitalism.

 

He raises the issue, as does Jacques in his book, that China will most likely continue its development by following the same path and remain as different from the West as it has always been. To the Americans particularly this is "a terrifying scenario" since it would confirm that Westernisation (and, of course, "democracy") do not ensure economic or any other kind of success, and that they may, if anything, be an impediment to development as many authors have already pointed out in comparisons of Hong Kong and India. Gray tells us that China's great development success and inexorable rise may be due precisely to the fact that China is so different from the West, which of course produces a peculiarly American hysteria stemming from the religious mythology that no nation can progress without adopting the full slate of American values and ideology. But China is not America, and Americans will have to learn to live with this fact.

 

Of course the Western world, led by the US and its gaggle of international bankers, levy the same criticisms toward and make the same attacks on Germany as they do on China, denouncing Germany for its export-driven economy and current-account surplus, claiming this creates "a deflationary bias" in the European and global economies. Of course, it does no such thing; instead, it simply keeps Germany's economy viable in the same way as China's policies do for China. Germany strongly denounced the US Treasury criticism as it should have done, claiming its healthy economy contained no imbalances in need of correction and that its current-account surplus was no concern.

 

While the US once again mounts its morally righteous white horse to ominously rate Germany and China as "problem economies", it is in fact the US that is the world's largest problem economy with severe structural defects that place great strain on other nations and that will one day have to implode. Germany, like China, sees no particular need for dramatic increase in domestic consumer spending. And it is the US that desperately needs massive spending on neglected infrastructure to prevent the physical collapse of the nation. It is not China or Germany where bridges are collapsing from 60 years' lack of maintenance. In addition to constantly lecturing the Europeans on ways to painlessly reflate the US economy, the Americans continue to push Europe for more financial access and deregulation that would permit even more potential for destruction than they experienced by following the US in 2008. Unsurprisingly, the Americans are having an increasingly difficult time obtaining receptive ears in Europe.

 

 Then we have the IMF, one of the main chapels of the Western capitalist church, adding its contribution to ease China's way into the blessed economic hereafter by pronouncing that the best way to succeed is to fail. The IMF warns that China's economic growth could slow to as little as 3.5% unless China takes immediate steps to slow its growth to 3.5%. Of course this makes no sense, but then this is religion, not economics.

 

The IMF is urging China to "promptly" carry out financial and economic reforms which include severely reducing investment, cutting exports, taxing real estate and strongly encouraging consumer spending, to say nothing of revaluing the RMB. The IMF recognises these steps would have "some short-term adverse implications", apparently without recognising the even greater long-term implications. The theory seems to be that reducing economic growth to near zero would give China "a chance to work out its toughest problems".

 

I fail to see how. China's toughest problems are entirely from Western meddling in China's affairs, but Alfred Schipke, senior resident representative at the IMF, claimed that if China officially reduces its growth target, this would be "a strong signal that you are moving ahead with your reforms". I have a better idea. Cancel Schipke's visa and deport him from China, as "a strong signal that China is losing its patience with Westerners interfering in China's internal affairs". And for the record, real estate taxation is a Western model, not a Chinese one. It is a Western solution to an Eastern problem which, if implemented, would affect Chinese society and economy in hundreds of large and small ways, with echoes that would reverberate for decades and cause unpredictable upheavals. It may be that China should one day tax property, but that day is not today and absolutely cannot be even considered as a response to Western pressure. China really needs to rid itself of the foolish delusion that Western 'advice' has value to anyone but the West.

 

We also have George Soros jumping into this fray, contributing the same brand of believable wisdom as he did in claiming that the world had lost faith in gold as a store of value. Soros is mouthing the same neocon agenda as the US Treasury Department, claiming China needs a shift from exports to domestic consumption if it wants to continue growing, but is long on empty claims and awfully short on justifying facts. The real incentive is related entirely to Soros' political agenda where he claims - again, with no justification - that this "new growth model" which China so desperately needs (at least, according to him), will produce "a fundamental change" in China's political model. And that's where we really are. All Western criticism of China inevitably resolves to America's political ambitions which require the dismantling of China's governmental system.

 

Soros is not only politically ambitious for his team, but rather dirty in his methods. His assessment of the hoped-for political destruction of China and his hopeful opening of China to external political control, was to suggest only two choices for the country. One would be "political reform that would give people (primarily Americans and Jewish financiers) greater influence over political decision-making" in China, and the second was that China would resort to internal "repression" or would "seek external conflicts to maintain the cohesion of the country". You don't have to be very smart to see that Soros' observations are complete rubbish. It would be a fantastic economic model indeed where buying more refrigerators automatically unleashes a genetic impulse to create civil instability, and even more surreal that the only way for a nation to prevent this outcome would be to launch regional wars with its neighbors. Soros is actually telling us that if the Chinese people begin buying more things, this will automatically challenge "the cohesion of the country" in a way that only sustained repression or all-out war will prevent. Well, if increasing consumption will result only in repression and war, why is he so strongly recommending it for China? Soros' entire position is deranged bullshit. The man needs to be told to shut up and mind his own business. Either that, or somebody should burn him at the stake as a witch.

 

Then we have Michael Pettis, a finance professor at Peking University and a Senior Associate at the Carnegie Endowment for Perpetual War. Pettis wrote an article for the Wall Street Journal in which he told us China "urgently needs to rebalance" its economy (offering no reasons because none exist), and offered several options for "fixing China". One was to substantially appreciate the RMB, which he correctly acknowledges would destroy domestic manufacturers, but then tells us this would "disproportionately help urban households for whom import costs tend to be important". Considering the small amount of China's household spending that goes toward imports, and comparing this to the devastation that would result in the manufacturing sector, Pettis' statement is merely stupid. Saving 0.5% of a household budget hardly compensates for 40 million unemployed workers. Pettis also neglects to mention that RMB appreciation helps primarily the currency speculators and the US government which wants to kill China's threat to its quest for global hegemony. And in any case, there is no evidence that China's currency is appreciably out of line, so this is a dead issue.

 

But, according to Pettis, "the best way" for China to rebalance is to commit economic suicide by raising interest rates during a worldwide recession. He goes on to tell us that "If the government hikes the cost of capital, the winners will be every saver, whose higher income will then allow him to consume more". So much rubbish here, it's difficult to know where to start. First of all, the Chinese don't want to consume more; they want to save their money because they have better things to do than buy overpriced US-branded trash. And besides, consumer spending is an American pathology, not a world religion. High interest rates would of course cause the RMB to rise, rendering China's exports less competitive, damaging an already suffering sector and causing substantial unemployment. It would also increase the flood of hot money into China, thereby further exacerbating the exchange rate and adding substantially to domestic inflation which would increase the prices of domestic goods by far more than the minor depreciation in the prices of foreign goods, leaving all Chinese much worse off. Pettis ignores the prospect of killing investment in infrastructure, plant and R&D which are so vital for China's continued development, but he salivates at the thought that the largest losers in his scheme would be China's state-owned enterprises whom he disparages as having "for too long treated the banks as ATMs". Not that it's any of his business.

 

Interest rates would have to rise by heavy margins before they translate into higher incomes for China's general population and translate further into increased consumption, and the small resulting increase in consumer demand would be overwhelmed by the severe damage to China's companies that so badly need increased capital for both operations and investment. Given the fragility of the world's economy, a sharp increase in domestic interest rates would serve only to add China to the long list of basket-case economies. The truth is that China is doing it right, and sure doesn't need the advice of its enemies on how to "fix" itself. Pettis are beginning to remind me of Gordon Chang - always wrong, but never in doubt. I hope nobody believes this man's ideological drivel.

 

It worries me that Pettis is filling the minds of Chinese students with a disastrous ideological heresy containing precisely those elements so useful to the destruction of China's economy. I sincerely hope this man is being employed by Peking University only to serve as a bad example. And my congratulations to the Wall Street Journal for publishing this piece of ideological rubbish.

 

China has a long list of so-called foreign professors hopelessly infected with American capitalist pathology and it worries me that their influence can corrupt an entire generation of Chinese students who don't yet possess the experience or breadth of vision to challenge their foolish claims. I will deal with this subject in detail elsewhere, but for the moment I would express the wish that China's university officials would pay a bit more attention to the class content of these professional seditionists.

 

And then we have Chinese so-called "economists", who probably received their education at either AmCham or Caixin, Westernised drones like Li Yining and Wu Jinglian, who solemnly tell us China's economic "new normal" is "a more proper development method", and that China's previous rapid growth was "excessively fast" and that such "improper speed cannot be sustained". Li further tells us that China's former pattern of "high speed with huge investment" should be abandoned because a slow speed is, according to him "more efficient". Li also claims that "China should bid farewell to excessively fast expansion with annual growth around 10 percent", because "such improper speed cannot be sustained." And what exactly would be the definition of "proper"? This is not economic theory; it is a moral judgment that results only from indoctrination by Christian-Zionist Americans. But according to these two geniuses rapid growth and large infrastructure investment should be abandoned, meaning that China should essentially cease its growth and development, leave things as they are now, and focus on consumer spending to drain all the cash from the economy and put it into the hands of a few American multinationals. The way god wants. Then, in a bafflingly unintelligent non sequitur, Li tells us that "Economic declines are inevitable", but we don't have to worry much because "the downturn would be acceptable". Acceptable to whom, exactly? Apparently, we should conclude from this man's nonsense that since economic declines are "inevitable" anyway, we might just as well cause it ourselves now instead of waiting for it to occur naturally. Why wait for the gods of economics to trash our economy someday in the future when we can make it happen today? And, just to prove he fully absorbed his American education, Li also tells us "We should support private businesses and small enterprises"; in other words, kill those damned Chinese state-owned enterprises that the Americans so much hate. Do people like this have to pay to get their rubbish published, or does Xinhua do it for free?

 

•China's Economic Nationalism

 

 

 In 2006 the Financial Times ran an interesting article titled, "Why China must turn away from economic nationalism". There was no byline but the author was identified as the managing partner at the law firm DLA Piper Beijing, who I assume was Dr. Liu Wei. In the article, we're told that perhaps China is "turning its back on foreign investment", that "the international business community is worried", and that maybe this "populist response to public resentment" will herald "a new era of economic nationalism" in China. We're told that much new legislation appears to be "primarily aimed at foreign investors", which leaves American businesses feeling "threatened". Moreover, Chinese companies are launching internet wars "to incite nationalistic objections" to what Li Deshui, former head of the National Bureau of Statistics, termed "malicious take-overs" of Chinese enterprises, and stated that this process of "selling out the country" could not be permitted to continue. The author further tells us that these views have received widespread popular support, and that "there is widespread concern, verging on paranoia" about privatisation of China's SOEs. Doesn't sound good.

 

The author tells us that American corporations must heavily lobby the Chinese government to resist at all costs "the temptation of economic nationalism" which will ultimately harm China, and that the government must be made to understand that this short-sighted attitude is not a sign of economic maturity. The article finishes with the advice that "the harsh realities of competition in an international economy" dictate that China must permit capital and resources to be efficiently allocated "by letting the market decide". Where have we heard that before? But before we credit the Americans, and especially the commercial sages at DLA Piper for offering good advice to help save China from itself, we should review the meaning of the term "economic nationalism" and the fundamental position of the American government toward this apparently self-destructive attitude. We have already seen how the US many decades ago exerted enormous political and military force to eliminate what it called this "scourge of economic nationalism", which at the time it defined as:

 

"a philosophy designed to bring about a broader distribution of wealth and to raise the standard of living of the masses". And we can recall the US State Department further defining this attitude as consisting of people who are "convinced that the first beneficiaries of the development of a country's resources should be the people of that country".

 

You can now see why this economic nationalism is a bad thing, why it would be so harmful to China, and why the Americans are so firmly opposed to it. If China should be so foolish as to decide that the benefits of China's development should flow primarily to the people of China and raise their overall standard of living, the Americans will be unable to empty all the Chinese bank accounts. Just as the US claimed that Mexican oil didn't belong to Mexico but to US multinational oil companies, so the new Chinese wealth doesn't belong to the Chinese but to American multinationals.

 

But according to our unbiased, disinterested and clear-thinking sage at DLA Piper, China's objections to this American philosophy "are not signs of economic maturity". Fortunately, he has a solution: heavy lobbying in favor of further US takeovers of Chinese companies. And he concludes with this gem of disingenuous wisdom, "If a potential transaction risks provoking "nationalistic" objections, investors will need to couch the deal in the language of mutual benefit." In simple terms, this means that if the Chinese begin to see clearly the dangers in the viciously predatory form of US capitalism, we must be clever enough to tell them it's good for them and hope they will be stupid enough to believe us. I must say it frightens me to think some Chinese might actually be tempted to believe such obviously dishonest and self-serving rubbish.

*

 

Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at: 2186604556@qq.com.

 

Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.

 

Copyright © Larry Romanoff, Moon of Shanghai, 2020