China in the Crash Lane
Richard Westra Ph.D.
Graduate School of Law
Nagoya University
JAPANTake-off on Anti-communist Steroids• World history, per capita GDP growth over 6 percent
for an extended period has occurred only three times
with each episode taking place in post WWII EA• Japan’s spurt, averaging over 8 percent annually from1955 to 1973, is the first• Second, South Korea and Taiwan’s growth in GDP percapita in the period 1982-1996, averaged 7.4 percent
and 7.1 percent respectively• Third, there is China’s post 1978 trajectory averaging
near 7 percent GDP growth per capita to 2005 which is
the longest in history

China Paradox• Paradox is that US anti-communist booty flooded region toprevent spread of communist revolution• China’s subsequent exclusion from “Free World”
comparative advantage predicated international economic
intercourse forestalled what was surely the fate of acountry in its predicament• Without socialist revolution – given China’s poverty, legacyof imperialism, huge subsistence agrarian population,parasitic landlord/gentry ruling class (Nationalist powerbase) – it would be another “Bangladesh” today• As China turned outwards at the outset of the Deng
Xiaoping era it did so with a healthy disciplined workforce
imbued with industrial skills, a rate of literacy over two
thirds of its population + in region marked by advanced
network of trading and technology linkages

Contagion• Deng Xiaoping supported creation of special economiczones (SEZs) as “windows to the world” – garner foreignexchange + support industrial modernization• 1984 – opening 14 coastal city regions for FIE (jointventures)• 1986 wholly foreign owned FIE’s permitted• Paralleled “stripping” of state sector + “dual track” pricing =orgy of military/provincial elite corruption• 1992 Deng endorses “socialist market economy”• 1992/93 massive FDI flow into China – $10B, $30B
• Accompanied by increased state macroeconomic planning+ fixed investment leaping to over 30% GDP• 1995 – 2004 foreign capital generated over 30% China’s
growth + 2004 70% FDI to 100% foreign owned business• Estimate by 2004 foreign capital controlled 76% China’sindustry

Why China (Domestic constituent 1)?
• First in contrast with third world countries on
the erstwhile “Free World” membership roster(with comparably low GDP per capita), Maoist
policies of primary and secondary education
as well as good basic health care for China’s
vast peasantry offered up a literate anddisciplined workforce• This topped up by an authoritarian polity
ensuring broad social stability

Why China (Domestic constituent 2)?
• Low wages – BUT this NOT just a matter of seemingly
inexhaustible work force:– “household responsibility” system guaranteeing land torural households created a fallback subsistence option foroff-farm laborers which lowered the cost of labor as it
simultaneously rendered part-time and short term
employment contracts palatable to the burgeoning offfarm cohort– The hukou household registration system fostered a social
divide in China between “legal” urban resident permit
holders and those from registered rural households– Rural residents swarming to China’s factories excluded
from urban entitlements.
– Cannot sell their land or rural homes, ultimately anchoring
their and any offspring’s future in rural villages– This further represses real wages below subsistence levels
and constitutes a de facto subsidy to foreign capitalInternational Constituents 1• From 1980s into 1990s MNCs moved from relocatingproduction and assembly to export platforms toward thewholesale disarticulating of global production into “valuechains”• Estimated that 60% of global trade is now constituted bytrade in sub-products in “intermediate goods”• ICT revolution in logistics empowered MNCs to exercise
Stalinist-like centralized suzerainty over vast geospatiallydispersed networks of suppliers• Lynchpin of this is non-equity mode (NEM) of MNC globalcontrol• By 2010 NEM control employed a global labor force ofaround 20 million accounting for 90% of production costs
in toys and sporting goods, 80% in consumer electronics,
50 to 60% of automotive components world-wideInternational Constituents 2• Simultaneously manufacturing activity exploded across the thirdworld• By 2000 third world share of global manufacturing value added roseto 24%• By 2001 share of manufacturing exports in third world exports as awhole was 70%• Total value of third world manufacturing exports increased 4 times
between 1980 and 2002
• Developing EA share of global GDP rose from below 10% in 1980 toover 28% by 2010
• EA share of global exports leaped from 8% in 1980 to near 26% by2009• EA export dependency (export/GDP ratio) predicated uponintermediate goods trade jumped from approximately 15% in 1982
to 45% by 2006
• Sub-products over 50% interregional import/export• China’s imports of manufactures – share of intermediate goods
grew from under 24% in 1992-1993 to over 59% in 2006-2007

Flying Goose?
• Vitiates Akamatsu’s “dynamic comparative advantage”
where Japan to export “product cycle” and transplant
production processes among middle-income “geese”• Under current conditions where manufacturing
disarticulated – not clear how such might ever come topass• Not only has the export dependence of low and middle
income countries in EA leaped – as low and middle
income countries proportion of global sub-productexports grew – growth in those economies of capitaland consumption goods exports remained stable since
the late 1980s• As for Japan, 29% of its imports were being drawn from
low income countries, by-passing the middle income“geese” where industrialization was to have taken-off

US at the Center• Trade deficit with China in 2007 was the biggest the US had
with any country. It exploded from $11 billion in 1990 to$274 billion by 2007
• 2007 China’s share of US total trade deficit was 32.1%• China’s trade with the US increasingly shifted to ICT
products. These composed 37.6% of total US manufactured
imports from China in 2005-2006 giving the impression thatChina was moving up the high tech ladder• But bilateral and country based figures can betremendously misleading• As China’s share of the US trade deficit exploded, over thesame period Japan’s share shrank from 21.1% to 10.2% andthe share of EA as a whole plummeted 16% to 7.9%
• Hence, while China’s trade surplus with the US bloated,
China was running a trade deficit with EA as a whole.

Chimerica?
• One estimate has the US-China nexus
contributing over 45% of global growth in2005• Another sees it accounting for more than 60%of cumulative growth in global GDP in theperiod 2002-2007• But this actually the US-anticommunist
showcase EA nexus in new garb

Debt
• US consumption sufficient to foment China’s meteorically highgrowth rates based on debt
• Spiking from the close of the 1970s to 2007 total US credit market
debt skyrocketed from 170% of US GDP to 360%
• Skyrocketing in tandem with total credit market was US household
net worth• Expansion of credit increased the value of both major household
sector assets – real estate + equities• The median price of a single family home in the US more thanquadrupled between 1980 and 2007
• Dow Jones Industrial Average surged from 1,000 in 1982 to 14,000
by 2007• Rising asset values fuelled a household spending spree largely
financed by using homes as ATMs
• The latter saw consumer credit increase 6 times. As US
consumption as a proportion of GDP jumped to over 70%, US
household debt bloated to 98% of US GDP

Meltdown 2008
• China, with an economy cushioned by a large
current account surplus and swelling foreignexchange reserves pumped the equivalent of$570 billion at end 2008 into a spate ofinfrastructure projects, eliciting the refrain“China saved the world”• Refrain rings true as behind direct linkage ofUS debt- driven consumption serviced by MNC
value chains in EA directing final assembly
through China has been instigation of a global
raw material resource supply boom

Recovery?
• Injection into China’s economy of an amount equal to 15%
of its GDP made it largest relative economic stimulus of all
the meltdown bailouts• Accompanied by government admonition to state banks toramp up lending• China recovered rapidly from the US originated crisis• Recovery saw fixed investment in China jump to awhopping 46.2% of GDP by end 2010• Investment driven growth in China dampened adverse
effects of the 2008-2009 meltdown in EA• China’s demand for raw materials maintained growthtrajectories among resource exporters in Latin America and
Sub-Saharan Africa• Estimated that China’s growth contributed over 40% of
global growth between 2008 and 2010

Three Narratives• Rebalancing = right policy adjustments China willconsume in a fashion which induces highdomestic growth rates while pulling in US andother advanced country exports in a fashion
which engenders mutual prosperity and remedies
the US external deficit• Decoupling = rise of BRICS led by China signals
gestating of a new orientation for the globaleconomy• Reform = China’s growing middle class willcompel economic and political change in line withhistorical experience of previous developers

Rebalancing• China’s per capita GDP just above Jamaica and just below
Timor-Leste• Such GDP per capita ensures China’s growth remains
resource intensive for some time
• Little in the way of direct demand for particular goods andservices exported by the US and high income EU economies• Nature of consumption differs sharply from that shapingglobal value chains• MNCs catering to US consumers structured value chainsaround things like brand recognition, product diversity,
quality control and environmental/energy impacts ofproduction• China’s demand turns on low cost, standardized goods withscant concern with quality, pollution or energy intensity
which factor into the division of labor constituted by MNCsand NEM contract networks

Cont’d• No replacement for US consumption• 2007 and 2008 US household annual consumption
averaged around $10 trillion• Household consumption in Japan and Germany during
the same period averaged only $2.5 trillion and lessthan $2 trillion respectively• By mid 2011 US household debt as a percent ofdisposable income had only fallen from close to 130%
to around 110%
• Even if US households successfully deleverage over the
next decade their spending will be considerably
reduced in the absence of the home-ATM connection

Decoupling• From dawn of neoliberal era world economy characterized byburgeoning capital flows into the US and US dollar
denominated assets• Trend punctuated by brief episodes of capital outflow, such asthat preceding the Asian Crisis, only to see monies stream
back to the US as bubbles burst.
• Period from the beginning of the 21st century when theacronym BRICS is coined – as capital inflow to the US anddollar denominated assets spiked, a parallel sustained capitalflow to third world so-called emerging markets occurred• This flow entailed increased volumes of securitized “lending”
to private borrowers• When the meltdown hit – emerging market flow temporarily
halted as money retreated to the “safety” of dollar holdings

Cont’d• As US “quantitative easing” liquidity injections
kicked in under largely zero interest rate
conditions, speculative flows into the third world
trailing the China driven “real” investments
spiked• China’s investment it amounts to “half-empty”
high speed trains, “three-quarters empty”
stations, “three-quarters empty” highways witheach competing with new airports for nonexistent traffic to nowhere• There is no rationale for a country at that level of
economic development to have not justduplication but triplication of those infrastructure
projects

Reform• China one of the most unequal societies on earth
in line with the usual suspects in Sub-SaharanAfrica• Recent alternative data show inequality
worsened considerably from the pre-meltdown
period giving China a GINI measurement not of.46 as widely noted for 2006, but a GINI of .61• That is, China’s top 20% command almost 70% of
all income, the bottom 20%, 0.5%
• The respective figures for the US are 50.3% and3.4%

Cont’d• China has the world’s most billionaires. Recentestimates put their number at 408. US billionaires
number only 317• China’s potential middle class is wedged between
the billionaires and 700 million peasants• Projected to grow from 13.7 million households
as of 2010 to 167 million, or 40% of thepopulation, by 2020
• US, according to the OECD, currently has thebiggest middle class, 73% of the population• Like in US what now translates as “middle class”
life is dismal + China’s middle class unhappinessclaimed to be “the biggest risk in the world”

Cont’d• Talk by China’s political class of genuine reform istheater• Of China’s 1,024 über rich identified by Hurun’s
Rich List – 160 with a total net worth of $221
billion have seats in the current CCP Congress andassociated bodies• To compare, combined wealth of all 535
members of the US Congress is estimated at only
between $1.8 billion and $6.5 billion in 2010
• Control by the state of major investment projects,
land, commanding heights banks, feeds
corruption by China’s eliteCont’d• But what is hastening China’s maneuver into thecrash lane is the seething discontent throughout
the vast expanse of the country• The annual number of mass incidents of protest
and social unrest jumped from 50,000 in 2002 toaround 80,000 in 2006. In 2010 the number
surged to around 180,000• My prediction: As the world economic crises
deepens China decomposes into provincial
fiefdoms from whence it began at the dawn of
the 20th century