True hegemons prevail not by force, but by offering hard-to-resist Faustian bargains. A prime example is the “dark deal,” which underpinned China’s economic miracle prior to the new cold war with the US. That arrangement hangs by a thread.
“Our dark deal,” a Chinese official once explained to me, “turns on the US trade deficit, which keeps demand for our manufactures high. In return, our capitalists invest the bulk of their dollar superprofits into America’s FIRE [finance, insurance and real estate]. Once this process got underway, America shifted much of its industrial production to our shores.”
For about half a century, the dark deal allowed China to convert its excess production — or net exports — into rights over property and rents in the US. It ensured that the US dollar’s supremacy was just as functional to the interests of US rentiers as it was to Chinese capitalists.
Illustration: Mountain People
The longevity of the US’ global supremacy is, therefore, intertwined with China’s dilemma and with the US’ toxic domestic politics, which reflect the hollowing out of its working and middle classes. Without the US dollar’s global reign, the US’ deindustrialization would not have accelerated, and Chinese capitalists would not have extracted colossal surplus value from Chinese workers to stash in the US’ rentier sector.
Whatever the US’ rationale for targeting China, the cold war that the US launched under former US president Donald Trump and escalated under US President Joe Biden has placed enormous pressure on US conglomerates and the Chinese Communist Party to think beyond the dark deal which had hitherto been central to their respective interests.
However, conglomerates such as Apple Inc can do very little to decouple from China without being ruined in the process, so China has a risky, but real alternative: deploy its homegrown fintech industry to insulate itself from the US’ hostile measures.
Imagine bundling Google, Facebook, Twitter, Instagram and YouTube in a single application. Then, roll onto the same platform Skype, WhatsApp, Viber and Snapchat, add e-commerce platforms such as Amazon, Spotify, Netflix, Disney+, Airbnb, Uber and Orbitz, and throw in PayPal, Charles Schwab and every Wall Street bank’s app.
Stop imagining: This is what WeChat, Tencent’s mobile messaging app, already offers its users, who exchange more than 40 billion messages daily.
While streaming music or television shows, WeChat users do not need to exit the app to send money to anyone within China — or to millions of people outside of China who have downloaded WeChat and opened a yuan account with a Chinese bank.
This amalgamation of China’s big tech and finance — cloud finance — is a potential game changer. Compare a tonne of aluminum shipped from Shanghai to Los Angeles with targeted advertisements peddled to Americans via TikTok: Both yield dollars for a Chinese company.
However, whereas the dollars from aluminum depend on a Chinese-produced lump of metal physically migrating to the US on the coattails of the US trade deficit, the US dollars earned by TikTok in the US do not.
As Chinese cloud finance grows, China’s rich and powerful find themselves less subject to the US trade deficit nor to US policymakers’ power to regulate Chinese goods passing through their ports.
As the US’ new cold war threatens to squeeze Chinese conventional capitalism, China could end the dark deal that keeps it tied to US hegemony by mobilizing its homegrown cloud finance and pursuing a growth model that no longer relies on the US trade deficit.
Were China to take this option, the domestic and global impact would be monumental.
Domestically, the shift away from export-oriented physical manufactures would cause aggregate fixed capital investment to fall from about 50 percent of China’s national income to no more than 30 percent, with domestic consumption taking up the slack.
Globally, China’s decoupling from the US trade deficit would permit its cloud finance, ably assisted by the People’s Bank of China’s digital currency, to offer the rest of the world a yuan-denominated, cloud-based payment system that bypasses the dominant US dollar-denominated and US-policed payment system.
In the aftermath of the US and European authorities’ seizure of the Russian central bank’s reserves in response to the Russian invasion of Ukraine, demand for this Chinese payment system, and China’s cloud finance more generally, is skyrocketing. Severing the link to the US trade deficit is no longer a hypothetical scenario.
However, do Chinese policymakers really want to pursue it?
If they do, they would be ditching the industrial model at the heart of China’s economic miracle, incurring the wrath of China’s traditional capitalists, who crave access to the US trade deficit and to US dollars.
If they do not, China’s economy would continue to rely on a deal that gets darker by the day, as the clouds of the new cold war gather.
Perhaps their hand would be forced if the Biden administration persists in its effort to block China’s continued advancement as a technologically cutting-edge society.
How and when the dark deal gives way to an all-in bet on China’s cloud finance would decide the future of US-China relations — and perhaps the future of the world.
Yanis Varoufakis, a former Greek minister of finance, is the leader of the European Realistic Disobedience Front and a professor of economics at the University of Athens.
Copyright: Project Syndicate
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