As a leading analyst of China’s finance and economy, you were one of the first to identify and quantify the prc ’s deepening debt problem and to warn about the implications of its slowdown. As background to this, could you give us your view of China’s emergence as workshop of the world and second-largest economy on Earth? Clearly, its rise as the lowest-cost producer of a wide range of manufactures allowed it to secure, through imports, the increasingly complex capital goods and intermediate inputs required to climb the technological ladder, opening the way to an export-oriented growth path that was, at the same time, a particularly effective version of import-substituting industrialization (isi). It also produced the enormous current-account surplus and huge reserves of foreign exchange, mainly in dollars, that meant China could effortlessly endow its non-financial corporations with the steady flow of loans and subsidies that underpinned their accelerated, investment-driven growth. But what made this possible? How did its initial rise come about?
China’s emergence as a major exporting power from the 1980s to the mid 2000s was ultimately founded on its rich endowment of cheap and relatively skilled labour, the freeing up of that labour force in the late 1970s by way of a de-collectivization that issued in an historic wave of agricultural commercialization and rural industrialization (Township–Village Enterprises, or tves), and the reduction of trade barriers in the advanced world, culminating in China’s Most Favoured Nation (mfn) status and its joining the wto at the start of the twenty-first century. The Soviet Union had achieved a major industrial takeoff after World War Two in largely autarkic fashion, via isi. China, by contrast, launched its industrial build-up in the midst of the shift toward the globalization of the world economy, in which it came to play the decisive role. Over time, as you say, China’s inexpensive labour—plus government subsidies and low-cost loans for both domestic and foreign exporters—earned the country large trade surpluses and sizeable foreign-exchange reserves. At their height the latter totalled almost $4 trillion and provided China with the increased bank deposits/money supply to finance the stepped-up lending that underwrote the country’s historic growth in gdp and investment.
What role did China’s integration into the already existing East Asian trade and commodity chains play in this? It’s often said that it was this network, initially focused on Japan, Taiwan and Korea, that produced the capital goods and intermediate inputs that were worked up into manufactured commodities on the Mainland, and exported from there into the American market and the other advanced-capitalist economies. Would you agree with that?
Yes, I agree, but I would also highlight three further reasons why China was able to take advantage of its central position in the emerging global value chain so effectively. First, in terms of its size, and especially the scale of its cheap labour force, China far surpassed Japan and the nics combined, with nearly a billion people even as early as the 1980s. This huge population made for a continually growing labour supply, which put downward pressure on labour costs, especially with the entry into the labour market of perhaps 150 million migrant labourers from the countryside. These workers were able to provide labour power at a particularly low price because they could subsidize their incomes from the peasant plots that they never relinquished. Second, China’s rise coincided with major advances in information technology, which made possible the construction of the sophisticated international communications and transportation networks through which the economy expanded. Third, globalization and international free-trade agreements, such as the wto and nafta, brought substantial reductions in barriers to imports throughout the world, opening the way for China to make the most of its increasing cost advantages and competitive strength. The prc thus became part of the global production chain to a greater extent than even Japan had managed. According to one study, China’s imports struck more industries in the us more quickly than any previous wave of imports.footnote1
What about the role of the Chinese government in underwriting growth? How has China’s organized capitalism, driven by subsidies and loans from state bodies at all levels—central, provincial, county, local—served to push growth forward?
What we have here is a kind of path dependence, where transnational producers across many light and increasingly also heavy industrial sectors came to rely on Chinese inputs for a growing part of their production chains. China has spent billions, even trillions, of us dollars on investments to maintain and expand its place in the global value chain. The support that its organized capitalism provides for this effort comes in part in the form of cheap land, world-class infrastructure, low taxes and cut-rate energy prices, as well as cheap credit for domestic exporters and, more and more, for firms competing with imported goods.
China’s government, at all levels, has played an indispensable role in the provision of all these factors. Provincial, county and local administrations, much like state and city governments in the us, have been in competition with one another to attract investment to their localities, and they have done this by providing the greatest possible incentives to non-financial corporate producers and exporters—building infrastructure, developing land, offering credit, and so forth. In this way, they have enabled Chinese manufacturing to climb the technological ladder, producing increasingly complex goods, so as to be able to compete in an ever-broader range of manufacturing products.