The way in which China was repeatedly in the Western news in the past week or so was quite ironic. Only its complexity and importance prevented the irony from being funny.
First, China’s growth rate of 6.9 percent last quarter, far higher than any Western economy, was reported as a disaster for China, followed by forecasts of imminent unemployment, collapse in trade, inward retreat of economic activities and turmoil amongst trading partners.
Second, the growth of the Chinese economy and its trading capacity were blamed for the failures of the industrial sectors in nations ranging from Australia to the UK, while the reports on Chinese President Xi Jinping’s (習近平) visit to London was wrapped in attacks on China’s human rights record, business morality and corruption.
Anyone dealing with Chinese businesspeople is warned of both their commercial aggression and their insidious cultural corruption.
However, because every Western government wishes to jump into the Chinese market, people find British Prime Minister David Cameron and Queen Elizabeth II welcoming Xi with pensive smiles.
British political leaders are trying to balance a condemnation of China’s human rights record and closure of UK company Tata Steel’s Scunthorpe, Dalzell and Clydebridge plants — for which cheap Chinese steel imports were blamed — against a substantial agreement with two state-owned Chinese companies for the construction of the UK’s first nuclear power plant in years.
Also on the table are contracts for UK construction companies taking part in a massive project in Xinjiang region aimed at building transport and energy infrastructures that would create a secure gateway between China and Europe through Central Asia. If economic growth wins elections in democratic nations, then the UK’s stance on the deals should be a no-brainer for Cameron.
Partaking of Chinese growth while doubting and condemning it has become the name of the international game played from Paris to Washington to Sydney, with the ball bouncing for a few days in London.
The irony emerged due to the failure to comprehend large forces: the character of the Chinese economy in the past and present; its possible future dynamics; and its potential impact on other economies.
For Taiwan it might be wiser not to mimic the behavior of the major economies, instead finding some perspective on the underlying issues and thinking about the most likely outcome for the economy in the short-to-medium term. For Taiwan at least, it is by no means all doom and gloom.
First, what is meant by economic failure? Western pundits are confused about this, realizing that a near 7 percent growth rate is actually very high. Some have suggested measures such as a decrease in popular consumption, which happens to be marginally worse for China than a decrease in GDP. This is not a smart move. As a series of global economic depressions over the last two centuries have shown, artificial extensions of consumer credit can give rise to growth inflation, which is illusory and soon collapses. So, fast growth in consumption might only be a measure of financial mismanagement.
After 2008, Chinese commentators were posing a figure of 8 percent as the desired minimum growth for maintaining job creation and increasing salaries with minimum effort, given the nation’s youth demographic and migration from poorer regions to the coastal and southern regions of China.
However, the figure took little or no account of the shift in demography, or the effects of policies to transfer the resources from the economic zones to interior regions where labor is cheaper.
The second element is expensive, but capital is not a growth constraint in China.
Training workers and building infrastructures in interior regions constitute the ideal form of expenditure — especially for local governments — that reduces capital surplus and decreases pressures on profitability. Roads and civil structures can reduce the costs of small, struggling businesses.
Given that it would help distribute growth more fairly, investing in inland regions would have a significant political effect, considering the large number of disturbances in agricultural settlements and small towns. Externally, it can increase China’s soft power, as it might be seen as an environmental improvement and a measure of social progress.
It can be argued that such investment is analogous to the export of private capital, reducing possible frictions with players such as the US, the EU and Japan, as well as acquiring key imports, as represented in the case of the Xinjiang project.
A Chinese economic downturn is a statistical certainty on two counts. As with Japan from the 1980s onward, initial high-growth quickly absorbs surplus labor and land. When the labor market gets closer to full-employment, there is bound to be an increases in wages, rents, commodity prices and so on. This can be offset by technological changes and clever policies, but these take time.
Second, the effect is merely mathematical. Sustained growth adds increments to an increasing total. An economy adding an increment of 1 unit to its total output of 10 units in 1978 (the beginning of Chinese economic reforms) would grow quickly: the “miraculous” 10 percent growth rate. If an economy grows even 7 percent for 10 years, then it would double its GDP. Looking at the same economy in 2020, the same increment of 1 unit on an output of, for example, 50 would amount to only 2 percent growth: a “terrible failure.”
With such calculations it is seen that China has been defying statistical logic for years, which is a positive phenomenon for the global economy since 2008.
What about the dynamics of the Chinese economy and its international impacts?
One of the reasons China has flooded the UK with massive investments and corporate acquisitions is that China’s growth has depended on foreign technology and expertise, which the government financed with the export of capital that could not be absorbed by the nation’s domestic market — 300 million Chinese middle-class consumers provide neither an adequate pool of skilled professionals nor enough sophisticated producer or consumer demand to absorb the nation’s growing capital accumulations.
The second reason is that high growth absorbs raw materials and foodstuffs. The effect was also high in Japan during from the 1960s to the 1980s, to the benefit of Taiwan and other fast-growing Asian economies. It tended to be historically low in the US, where the sheer size and natural variety of the continental US secured even early oil needs.
However, for a supplier of raw materials like Australia, it is the retreat of the Chinese growth rate — not its increase — that causes negative outcomes: A collapse in commodity prices led by the downturn of Chinese iron ore demand has seemingly threatened Australia’s political stability.
Every developed economy has gone through a similar developmental stage. This is a reflection of what Western capitalist economies, led by Britain, did to China in the 19th and 20th centuries, though far more violently — by acquiring sovereign concessions and spheres of interest within China, creating industrial cultures in cities such as Shanghai that were copies of those in Manchester or Birmingham.
From this perspective it might be said that plans to place London as a service center for the yuan, with the UK as the first place outside of China to issue short-term yuan bonds, is actually a weak, but exemplary, case of the empire striking back.
However, Taiwan is another nation. Taiwanese should not cheer at lower growth rates in China. If there is an emerging technological gap in China, and if the theft of ideas and techniques from Japan and the West has become more difficult thanks to legal measures and increasing global wariness, then it means the nation is in a strong position to deal in technological products, as well as in expert consulting.
This would provide China with a cheaper alternative than setting up such facilities, many of which would take time to mature.
Taiwan has realized, as Japan did earlier, that innovation comes from cultures rewarding free analysis, challenge and debate, and these do not form overnight.
If China’s slower growth is caused by a technological ceiling, then Taiwan can provide technologies and expertise in many areas. Not only is technological capacity high, but also its proximity to China reduces transportation costs, while its linguistic and cultural similarities vastly reduce transaction costs across the board.
In contrast, the collapse of Chinese growth would have adverse political and economic consequences.
A growing China, facing technological and institutional inflexibility and low levels of soft-power, might be the ideal environment for Taiwan’s medium-term economic growth and social welfare. A Chinese economic failure, on the other hand, would give rise to all sorts of princelings currying favor with the Chinese by targeting a nearby independent, capitalist Taiwan.
Ian Inkster is a professorial research associate at the Centre of Taiwan Studies, SOAS, University of London and editor of the international journal History of Technology.
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