The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an

Enemy
Will Hutton

Launch at Foreign Press Association in London:

http://www.foreign-press.org.uk/showarticle.pl?id=68;n=10

Summary:

China’s economy is artificially inflated, and lacks the internal infrastructure to

sustain its current level of growth. With such a precarious economy, the only way
for it to go forward is to start allowing a traditionally democratic public realm that
would challenge the authority of the Communist party. America would be wise to
let this process run its course, remaining a full trade partner with China while re-
examining its own commitment to the Enlightenment values that led to economic
success. Alternatively, China could relapse into a stronger authoritarian regime to
counteract economic collapse caused by too much pressure/protectionism from the
West.

I recommend reading at least the summary of Chapter One in full.

Chapter One

• Great Questions regarding China:

o 1 – can China reach potential challenging point as greatest power in the
world without democracy or real capitalism?
o 2 – will the US be wise enough to hasten reform in China by keeping
global markets open to it?
• the U.S. and China are big enough to think in “old nation-state terms” re: global
domination, military power, etc.
• Domestic support for U.S. further leading integration of world economies is
eroding (see reaction to Dubai World Ports).
• Global economy is not unstoppable. It needs to be re-designed, if it can find
sufficient support.
• China statistics:
o $1 trillion in foreign exchange reserves.
o China will be the 2nd largest economy within a decade
o 2nd greatest importer of oil world-wide
o will be #1 exporter of goods by 2010
o the Pentagon estimates that China’s defense expenditure is up to 3 times
the declared $30 billion per year. (China has the 2nd largest military in the
world.)
o Wages for skilled workers never more than ¼ of those in Europe/the US;
unskilled: 1/30th. Building costs are 70% cheaper, with 1st-world
infrastructure.
 o China is very wasteful of energy: to generate every $1 of GDP, China uses
3 times more energy than the global average (and 4 times more than the
US).
o 400,000 Chinese die prematurely every year from air pollution.
o Ten per cent of today’s population is over 60, but there is no national
pension system (but most families only have one child). In 2040 there
will be twice as many elders as children.
o Shanghai’s per capita income is greater than $15,000, but the rural west is
at $1,247.
o Some estimate current unemployment at 23% of the labor force.
 To stave off potential dissent and protest, China has to create 24
million new jobs a year for migrants leaving the countryside, for
graduating students, and for people left unemployed by the
rationalizing of state-owned enterprises.
o Chinese economist estimates that late-90s government corruption resulted
in an economic loss to China of 13.3 to 16.9 % of GDP.
o Public protests have risen from 740,000 in 1994 to 3.7 million in 2004.
Strikes from 1,909 in 1994 to 22,600 in 2003. That is a total of 4 million
protesters and 1 million strikers.
• The only ideological change in China has been that the government now
condemns the “great leap forward” – essentially, China still champions 70% of
Mao’s teachings.
• Communism can’t embrace soft institutional infrastructure, such as impartial
courts, etc. Therefore, China has very few internationally competitive companies,
and almost no global brands.
• China has a system of “Leninist corporatism” rather than a proper or even
socialist market economy. It is Leninist in that it affords primacy to the
Communist party, and corporate rather than capitalist because it does not foster
economic pluralism. The system that the communists have created is, essentially,
unstable. Creating a stable economy demands more economic pluralism, which
will challenge the preeminence of the Communist party.
• Face-off between China and USA hinges on these four points:
o Oil
 Network of Chinese lines appearing in Canada, Venezuela, Sudan,
and Iran
 4/5ths of China’s oil is current transported through the Strait of
Malacca, which has American bases/fleets on either end.
o Trade & Currency
 US domestic opinion hung between conflicting values of “America
First” and an internationalist tendency that favors free trade and a
multilateral foreign policy.
 20 bills introduced in last 3 years that would likely cause Chinese
financing of US dollar to collapse.
 China is still largely a final-assembly exporter, so still dependent
on others for imports.
  From Beijing’s point of view, the call to revalue the renminbi is an
act of aggression that would destabilize the gov’t.
o The possibility that China will at some point test the commitment of the
US to defend Taiwan from a Chinese invasion.
 Because US’s economy is 5 times the size of China’s, this is
unlikely to happen very soon.
• The American interest is to make it impossible for China to turn back.
• There is a danger that the increasing presence of China, India, Brazil and Russia
will destabilize the global system. We could see a rerun of the period leading up
to 1914, with internal social strains and a fragmentation of the global architecture.
What if China is today’s Germany, on a collision course with Japan (pp. 21-22)?
• Europeans and Americans both forget how edgy and raw relationships are
between China and surrounding states. Borders are contested.
• China’s government likely could not survive another Tiananmen Square.
Legitimacy now depends entirely on continued economic success and urgent
appeals to nationalism.
• To prop up the Communist party, growth will have to continue indefinitely at the
average growth rate of the last few years (almost 10%). This is a mathematical
and economic impossibility:
o Most of the companies who could move production to China have already
done so; therefore, growth would have to come from domestic companies.
As it is, there are no Chinese brands in the world’s top 100, and only three
Chinese companies (Huawei, TCL, Lenovo) can be called multinationals.
• What lies ahead is recognition of the moral aspects of capitalism: a shared
common purpose that depends on the establishment of an overriding business aim.
• A relapse into repression at home and nationalism abroad would likely follow the
international reaction that is likely to occur if China’s institutional changes do not
accelerate (pp. 34-35).
• Because China must reform, it will. This will cause the west to accept a major
reorganization of its own global economic and social structures to accommodate
China. The West will have to reassert its scientific, technological and institutional
skills to maintain its place in the global economic order.

(begin history of China’s economy)

Chapter 2

• Understanding China’s rise, stagnation, fall, and subsequent rise is key to

understanding its potential sustainability.
o According to economic historian Angus Maddison, China constituted 33%
of the world’s GDP in the early 1800s, compared to 5% in 1950.
o The Chinese imperial system was based on cultivation of land – the
Chinese word for society, “sheji,” basically refers to the veneration of
agriculture. The Latin “societas” refers to human relationships and
citizenship. In the early 1800s, 92% of registered land was privately
owned, primarily by farming peasants.
 o The Confucian government worked because it was executed by men
embodying moral purpose rather than a system of impartial rules.
o The Confucian gov’t was unable to modernize China in the 19th century.
There were also many periods of plain bad government, and generally it
was too centralized, which resulted in long, intense uprisings from the
peasants.
o By the end of the late 19th Century, 25% of cultivatable land was owned by
absentee landlords, and the unofficial gentry had formed its own hardened
class.
o Despite having markets, technology, trade systems, sophisticated
agriculture, and private property rights, China’s Confucian
government failed. What it didn’t have was Europe’s network of
independent non-state (but often public) institutions that acted as
mediators between the state and the individual. This, paired with an
“Enlightenment Attitude,” is what allowed Europe to take over.
o Collapsed imperialist system left vacuum, in which regional
land(/war)lords tightened their grip and even became violent to maintain
order. These bad circumstances won out over the peasants’ unwillingness
to give up private property rights, the nationalists lost the ideological
debate, and the communists took over the vacuum.
• In Europe, it was cheaper for the government to make political concessions to
economic power centers than to coerce them via repression. That way they could
raise taxes without political resistance, to fund wars.

Chapter 3

• Communism came to power in China during the period of Roosevelt, Stalin, and
Hitler – a period of popularity for state-directed economic success. The
nationalists in China had to rely on the landlords and gentry, and so had no power
over them – the communists, it seemed, were the only ones who could organize a
powerful state to direct such economic success.
• Mao’s concept of the “mass line” – converted unsystematic ideas of the masses
into systematic ideas and sold them back to them as their own. He used party
cadres to do this, customizing communism to each province and not forcing it
upon any election.
• If no good can come from evil, why has China risen to success on the heels of
Mao’s policies? It’s much like other revolutions, which made a clean break with
the failing past to inaugurate much-needed modernity. (Like the French
revolutionaries?) Scholars often ignore how rough and also state-led the
transformation was in the west from agrarian to capitalist market economies.

Chapter 4

• In China’s reform, there has been a lot of action based on responding to events
rather than political consensus at top.
 • America won a victory for Capitalism when it opened full diplomatic
relations w/China in 1979 – this marked China’s embrace of developing a
market economy, however Chinese in nature.
• Huge victory has been spurred by Town and Village Enterprises, which,
though without proper legal standing or property rights, and outside the plan,
employed 52 million / 58% of Chinese in 1993, and 135 million by 2005. These
received less government involvement after 1994 and turned into more
conventional private firms. They are, however, in institutional no-man’s-land,
without clear property/legal/incorporation rights. State Owned Enterprises
were still used frequently. Entrepreneurs in the neglected regions managed
to cheat rules and pose as collective enterprises to form actual private
enterprise/informal banks. But this can only go so far before a full capitalist
institutional structure is needed.
• In 1993, the goal of the party was officially changed from building a “planned
socialist commodity economy” to building a “socialist market economy.” Small
state owned enterprise was “corporatized” or “let go” – not privatized, as
appointments and investment was still in the hands of the state.
• Internationally, China is increasingly dependent in the trade food chain. It has no
system for generating venture capital, and the only stock markets feed directly
into State Owned Enterprise.
(end history of China’s economy)

Chapter 5: The State They’re In

• We have no examples of communism converting into a successful bureaucratic

party accepting constitutional constraints, and it doesn’t seem that it has the
ability to do so, but that is what must happen.
• Hu Jintao focuses on Harmony w/ the world, Harmony w/Taiwan, and
harmonious development – rehashing Confucian rhetoric.
• China’s growth in 1993 was not shaped by government regulation or law, and so
its almost informal market degraded quickly into regional trade wars and
corruption. The state regained order by imposing taxes to slow growth, and
strengthening the central system.
• Lu Xiaobo argues in Cadres and Corruption that a post-revolutionary
revolutionary party is trapped between its need to become a bureaucracy bound
by rules and its revolutionary purpose – to break rules and bureaucracies. It is
judge and jury for its own cases. There is inconsistency between revolutionary
rhetoric and revolutionary practice. Communism cannot permit the concept
of an intermediate public domain between state and civil society, because
where state life ends and where (if anywhere) private life begins is very
ambiguous.
• Judiciary is funded by local government and so judges are mindful of need to
follow party directives. Parties also control police. NGOs have
government/party supervisors.
 • Communism is becoming tied to big business/state-owned-enterprise interest,
and ties to villages are disintegrating.
• The party has no intellectual or ideological defense against the argument that
there should be more formal pluralistic political representation and more plural
public institutions.

Chapter 6: The Economic Impossibility of the Halfway House

• It is impossible to assess how much of China is public and how much is private,
because the investment system is so well controlled by the state.
• China has a bad index of business competitiveness, which is worsening. It has a
disproportionate number of small-scale enterprises that can’t really compete.
• The state owned enterprise is barely profitable, and the financial drain on the state
has not really decreased; they basically employ people on welfare with state bank
credits.
• State often waits until a business does very well, then exerts legal rights to it to
capitalize on its success.
• The banking system is used to prop up the party, and until the last five years
there were a staggering number of nonperforming loans. Lending on
commercial terms to private businesses is only done on a limited basis. The
party appoints key bank executives.
• China needs $5.40 of extra investment to produce an extra $1 of output.
Twenty years ago, it needed just $4. The economy has actually become much
less efficient; Mao’s economy did better.
• If China accurately revalued its renminbi (as it is being pressured to do), it would
lose 30% of its current foreign currency assets. Its exports are artificially cheap.
This artificial valuing of China’s currency adds an estimated 0.45 percentage
point to china’s growth rate due to higher exports. In a free market, to counteract
this adverse effect on the currency, China would have to let its people take their
money abroad, which about ¼ of the population would do. That would reduce
growth from investment by ¼. Revaluing the renminbi would also cause a
lowering in price of agriculture.
• China’s healthcare system is ranked behind India and Bangladesh. Educational
improvements are a legacy of Mao, and progress has stopped. Rural schools are
forced to charge fees.
• The Chinese are unable to borrow against the collateral in their housing assets.
• To move to a lower-saving, higher-spending economy (which is central to a
modern capitalist economy), the party will have to allow property rights,
independent labor unions, and finance a better welfare system.

Chapter 7: The Democratic Graces

• Efficient markets require complementary market and non-market

institutions – sometimes even in tension with markets and market values, in
order to keep such markets honest. E.g. welfare systems, labor unions.
 • Charles Taylor identifies the separation of the public sphere and government as
one fundamental quality of an effective democracy.
• James Scott, in Seeing Like a State, points out that disasters have similar
pathologies: grand-plan thinking needs stylized aggregated facts, so that complex
reality becomes standardized. This comes from a confidence in the idea that
science and rationality enable humanity to become perfectly understood and then
mastered.
• Pluralism does not just happen – it must be protected and nurtured.

Chapter 8: The Soft Infrastructure of Capitalism

• Preconditions of self-sustaining pluralistic society: the “capacity to aspire” as

encouraged by Enlightenment’s creation of the public realm and commitment to
education. There also must be an encouragement of risk-taking: e.g. US’s lenient
attitude towards bankruptcy. This spirit is also bolstered by private property
rights.
• Peruvian economist Hernando de Soto estimates that, in the undeveloped world,
$9.3 trillion of “dead” capital is locked up in squatted land and favelas over which
the occupiers have de facto but not legal property rights. This is 20x cumulative
foreign direct investment since 1989.
• Humans have a proclivity for cooperation when reciprocity can be depended on.
Egalitarian societies seem to have a higher level of trust.
• Public companies in the business domain accept that they must justify themselves
to investors and the wider public with some kind of unifying vision or purpose.
• Asia has this same understanding of a sort of “corporate responsibility” from
Confucian tradition. Unlike in the West, this tradition was based more on the
family than the individual. Confucian authoritarian states managed the ruin the
economy anyway, and left a vacuum for communist ideology to fill.
• Japan is quickly making the transition to economic success and pluralistic society,
with the help of the creation of a public realm (e.g. 20,000 new NGOs).

Chapter 9: Of War and Peace

• China is taking advantage of “peaceful” international cooperation – all openness

of trade has been framed rhetorically as nationalistic, and leaders emphasize the
need to not pose a threat to world peace. The lie is that participation in the global
system can happen without exchange of ideas.
• Congressional mood, on both sides of the aisle, has been turning against
supporting China’s economy.
• A communist country buying American countries, as Europe and Japan have
done, is regarded as toxic by most Americans. The total value of Chinese-owned
American companies is not likely more than $3 billion.
• China has begun moving closer diplomatically to Iran, Saudi Arabia, Sudan, and
Canada (to name a few), apparently for reasons connected to oil. Worse, it has
 obstructed international efforts into investigations of human rights violations in
Darfur and Uzbekistan.
• Globalization has taken place in the framework of, first, a willingness to have
states share minimum common norms regarding the rule of law; and second,
a willingness to accept that security is provided by the United States. China
threatens to undermine this framework even while benefiting from it.
• China’s defense bolstering has been recognized by the US as an “active defense”
focused on Taiwan… and not a very sophisticated one at that. But it does run the
risk of jeopardizing regional military balances.
• America should be focused on keeping things cool with China, and keeping
the lines of communication open so that China can move towards pluralism
in an unthreatening environment – but it is doing the opposite. Also, it is
encouraging a fierce rivalry between China and Japan. This also is
encouraging further domestic nationalistic propaganda.

Chapter 10: It’s the Enlightenment, Stupid

• The U.S. is becoming more tempted to deepen its protectionist policies due to
China taking advantage of open markets. This temptation has been accentuated
by a perceived decreasing economic security in the middle class. If it can resist
this temptation, it will be rewarded, not only by more economic success, but also
by transforming communist China.
• Enlightenment institutions, not protectionism, stimulated America.
• American egalitarianism is an “aspiring egalitarianism” rather than the “leveling-
down egalitarianism” that Europe embraced.
• Foreign trade doesn’t have an impact on job security as much as technological
revolution and restructuring to meet new preferences – 500,000 American jobs are
lost and created every week. This is the same number of the upper estimate of
how many US jobs are lost to outsourcing per year.

Chapter 11: Born in the U.S.A.

• Some former neoconservatives (e.g. Francis Fukuyama) are now arguing that rule
of law and multilateralism are better long-term success strategies for the US than
preemptive unilateralism.
• US economists Baumol, Blinder, and Wolff have found that downsizing in
companies results in the same or reduced output, but succeeds in paying less for
any given hour worked… corporate responsibility to workforce needs to be
revived.
• The UN should accept that preemptive action against terrorism may be required
while setting a high bar in terms of proof – rather than a general rule in favor of
preemption, or a continued unilateral approach.

Conclusion
• Regarding globalization, we need to be less alarmist and more forensic.
• Suzanne Berger of MIT has found that while a Chinese worker may earn 4%
of the wage of an American worker, he is usually only 4% as productive.
Wage costs are not the be-all and end-all of economics.
• China’s weak legal system means that intellectual theft is rampant, and
makes multinationals much less secure.
• The west shouldn’t panic re: China, because it has a superior knowledge
economy.
• The Chinese economy has grown around contradictions and distortion, and there
is a limit to this sort of growth.
• The leaders who will succeed President and General Secretary Hu Jintao and his
team will be chosen in autumn 2007. There is current political instability in
China, and a fairly conservative team is expected to be chosen.
• China absolutely cannot increase exports at its current rate, and it also
cannot afford to acquire an extra $200 bn. In foreign exchange reserves every
year. Also, the US cannot continue its current habits without Chinese and
Arab investors eventually owning half of the US’s capital stock. There is a
disturbing American trend of wanting to test the international system for
absorption of imbalances.
• America needs to hold fast to the Enlightenment agenda both domestically and
abroad.
• “Hard” economics, politics, and social realities need to be complemented,
corrected, and enriched by countervailing “soft” forces.