In both the first and second US Presidential Debate, the candidates mentioned the word China eight times. At the first debate, held in Hofstra University on September 26, Donald Trump, the Republican Party nominee for the US Presidency, prefaced in his opening statement saying,“Look at what China is doing to our country […] They are using our country as a piggy bank to rebuild China.” During the course of the first debate, Mr. Trump contrasted American infrastructure with that of China. In comparison to China’s state-of-the-art airports, the Republican candidate contended that, “[the US has] become a third-world country.”
The Sino-centric topics upon which Mr. Trump expounded at the debate echo themes that he has made central to his presidential campaign:
- Arguing that the Communist Party of China manipulates the value of the Renminbi to ensure that it can inundate the US market with cheap exports and strip America’s manufacturing industries of their competitiveness.
- Declaring that the government of China is an existential threat to the US manufacturing economy, and therefore, the well-being of all Americans, via its tactics of illegal dumping.
However, this is far from full picture. First, the idea that China can manipulate its currency to the detriment of US export competitiveness has failed to hold up to the evidence. In semi-annual report to Congress, the US Treasury Department found that “no major trading partner of the United States” [including the People’s Republic of China] was artificially depressing the value of its currency against the dollar in order to boost exports to America.
While the Renmimbi has indeed fallen over 3% in the past year against the dollar and is currently at its lowest level since 2010, it is not due to government interference. Rather, it is due to markets reacting to the country’s sclerotic growth rates and fears of rapid capital flight.
In the second Presidential Debate, held at Washington University on October 9, China was centre-stage again. Asked about his proposed tax policy by an audience member at the town-hall style debate, Mr. Trump responded:
[Clinton] is raising your taxes and I’m lowering your taxes. That in itself is a big difference. The US is going to be thriving again. We have no growth in this country. If China has a GDP of 7%, it’s like a national catastrophe. We are down to 1%.
Despite the fact that many economists have doubts that Mr. Trump’s tax policy will indeed result in growth (in fact the Tax Policy Centre estimates it would would shrink the US economy by by 4%), one interesting point about this response is that Mr. Trump regards China’s GDP figure of 7% as infallible indication of their sheer economic might. He contends that because the US GDP figure is nowhere near those of China, it is a “catastrophe” (ignoring the economic literature which argues rich countries grow at a substantially slower pace than emerging markets due to the fact that the marginal gains from industrialisation diminish over time). In order to achieve growth larger than America’s current GDP figure trajectory, it would need to completely overhaul its economic model, rather than try to return manufacturing sector jobs to the country.
In contrast to Mr. Trump’s admiring view of China’s 7% growth, several China observers look at this single digit figure as a sign of serious slowdown and a pessimistic trend that the Chinese government cannot reverse.
China’s rapid economic successes stemmed from Chairman Deng Xiaoping’s 1978 market economy reforms, which jolted society out of decades of paralytic centrally-planned economy under Chairman Mao.
The growing middle class of China implicitly agreed to a quasi-“social contract” with the Chinese government: they cannot demand democracy and rule of law, and in return, the Chinese government delivers economic growth that would tangibly increases the quality of their living standards. And this symbiosis was successful: from the 1980s, the single-party government presided over the fastest sustained expansion by any major economy in history and brought more than 800 million people out of poverty, according to World Bank estimates.
These days, however, if economic slowdown in the country is the new normal and the Government can no longer honour its side of the bargain, this could result in social unrest across the country. Beijing will have to start making unsavoury decisions with its finite economic resources and inevitably, there will be winners and losers.
Recent events in China could be viewed as the proverbial canary in the mine shaft. The incidence of protests and demonstrations against the Government could portend this growing social discord, as the economic downturn is felt in Chinese people’s pockets.
One such example of an aggrieved group rallying against this economic downturn is the Chinese People’s Liberation Army (PLA) soldiers and veterans. On October 11, they staged a protest against personnel downsizing and pension cuts, as the government decreased its army spending budget.
As the current and former soldiers rallied at the Defence Ministry headquarters – only a few miles from the Tiananmen Square with its own legacy of tragic government protests – any evidence of the demonstrators’ actions was scrubbed from the internet by state-censors. The Guardian reported that most protesters at the demonstration refused to speak to foreign media about the matter.
As the economy contracts, having this particular group agitating for the government to not abandon them has many state officials worried. The last thing the Communist Party wants is for a group such as army officials and ex-soldiers to air their grievances publicly; they are a disciplined group that can organise, strategise and know how to use a gun. They would garner much sympathy among the Chinese populace and their demonstrations could subvert the projected image of strength pushed by President Xi Jinping, who is concerned over any potential for labour unrest throughout the country.
But as the economy continues to contract, the Communist Party of China will have to continue making these difficult economic trade-offs. In a milieu of stagnating growth affecting all corners of the developed world – from a Europe in perennial crisis mode, an ageing Japan and a US population looking inward in terms of protectionist trade measures and military revanchism – the Chinese economic engine can no longer rely on exports to achieve double digit growth and placate China’s growing and increasingly discerning working and middle classes. Compared to the decades of dazzling development, today’s single-figure GDP growth is now a feature not a bug of China’s economic system.
In response to this, China has been choosing to incur substantial levels of debt in order to spur economic growth. According to economists at the International Monetary Fund and Bank of International Settlements, China’s debt GDP is estimated to be worth over 220% of its GDP, a figure that worries international observers as radically unsustainable. The latest data from the Bank of International Settlements shows that since 2008, China has been responsible for nearly one in two dollars of new borrowing globally. China’s banking system is relatively well protected from financial shocks because it is still under state control to a large extent. In the event that any Chinese banks default on their debts, the Chinese government could – and very likely would – bail them out.
Furthermore, the largest share of debt in China is held by state-owned enterprises (SOEs), which are bloated, unproductive and in desperate need of reform to make them more competitive than their private counterparts. As SOEs devour vast quantities of credit (it is estimated that SOEs collectively account for almost 90% of the country’s entire corporate debt), smaller private firms are precluded from being granted credit, thus perpetuating the cycle of non-competitiveness in SOEs and the spiraling consumption of state subsidised debt.
Due to slow growth globally and a precipitous drop in demand for Chinese raw materials, SOEs – usually manufacturing-dependent industries – cannot feasibly produce materials (such as steel, coal, cement) at the same levels as they did in the past. However, SOEs do not respond to global or domestic demand in as dynamic a way as private firms probably would. Furthermore, as these firms provide a high rate of employment (despite their relatively lower profitability rates), there is a reluctance on the part of the state to curb their levels of output. The over-production of materials in conjunction with high SOE employment levels means that state unemployment figures are not an accurate measure of China’s economic well-being. They do not correlate with levels of productivity in the economy, so observers would have to look elsewhere to gauge the true health of China’s economy.
President Xi and his government struggle address the debt crisis. The choice to abandon the coveted growth model of credit-fueled investment and swap it for painful restructuring/downsizing of SOEs (and incur the social backlash from rising rates of unemployment) is a choice that may well be too unpalatable for the government to stomach at this time. Delaying hard choices and deferring of looming debt bomb could constitute a body blow to future growth, which have a ruinous ripple effects throughout the global economy.
In response to this new reality, the Chinese economy is consciously transitioning from an economy reliant on manufacturing exports and capital expenditure, to one based on consumer consumption and service industries, as indicated by figures recently release showing that China’s services sector now accounts for more than half of its $11-trillion economy, while exports are shrinking.
Trump’s remedy to China’s economic “threat”
Placing punitive tariffs on Chinese products in the hopes of returning manufacturing to U.S. soil is a cornerstone of Mr Trump’s Presidential platform. However, economists argue that tariffs would not be the panacea to bring back high paying manufacturing jobs, since many of the processes carried out in manufacturing are becoming increasingly automated. Instead, they would most likely incite a trade war. Mr. Trump pledged during his Presidential campaign to institute a 45% tariff on imports from China into the US. However, in a report published in September by macroeconomic research firm, Capital Economics, this could result in retail price of Chinese-made goods increasing by 10% in the US. In contrast a trade war with the US would not cause comparative damage to the Chinese economy as exports to the US drive only 3% of China’s GDP.
Donald Trump paints a reductionist view of China’s dominance on the global stage and an even more simple remedy. In fact, this type of reductionism highlights the one dimensional nature of political campaigning in democracies and the human flaw in us all to find black and white representations of our reality more appealing than the complex and ever changing world we all live in.
It is far easier to run a campaign on the zero-sum slogan: “Vote for me, or China will destroy us”, rather than articulating to the electorate a far more nuanced platform that would only end up resembling a Joycean stream of consciousness, stating:
“Certain sectors in our country’s economy are suffering because of the vagaries of globalisation, of which the impact of Chinese exports plays a role, but the Chinese government is currently in a state of flux as it embarks on the painful transition from a ‘manufacturing-for-export’ economic model to a ‘services-for-domestic-consumption’ model for growth and, therefore, it is in America’s interest to keep trade open and tariff-free with China in order to mutually benefit from increased trading opportunities as a trade war would hurt us more than it would hurt China. Also, there is a possibility of China defaulting on its unprecedented debt and it could pose a serious threat to the global economy, as China alone accounts for over 15% of the globe’s economic activity, so it’s better to work with China than vilify and isolate it… but nonetheless, we have to stay vigilant and bring issues to the neutral WTO if we feel that China is engaging in unfair trading behaviours… ”.
The first slogan is slightly more catchy. Unfortunately, reducing the issue ad absurdum benefits no one. Mr. Trump’s simplified view of the Chinese threat precludes any substantive debate on the most effective policy measures to enact should he be elected to the White House in November.
Rather than regard China as an economic or political black box, it is vital for any discussion about China to include acknowledgement of its internal challenges and social unrest. Important metrics that can be used to gauge the state of China’s economic stability include the incidence of protests by financially aggrieved citizens, the level of debt accumulating in the country (particularly SOE debt) and the rate to which China is transitioning away from export-led growth, to name a few.
So sorry, Mr. Trump. Unfortunately, it is no longer sufficient to recite GDP figures and use it as a proxy for a country’s economic might. The world is bit more complicated than that.