In recent years, the Chinese economy has shown signs of trouble after three decades of prosperity. World Policy Journal spoke with Ho-Fung Hung, professor of sociology at Johns Hopkins, to discuss his recent book, The China Boom: Why China Will Not Rule the World. Hung argues in his book that the period of growth that China is experiencing will soon come to a close, and that talk of its global dominance is misleading.
WORLD POLICY JOURNAL: You say in your book that the end of China’s boom is a matter of time. What can China do to ease the transition out of its boom?
HO-FUNG HUNG: The end of the book is not that obvious when I was writing it, but now it’s become more obvious to everyone. The boom is ending because China’s export cannot be as global as before but more importantly, investments have led to accumulation of overcapacity and indebtedness of the economy, which according to some estimates is about 250 percent of GDP. Actually that is getting it into a debt trap. There are usually two solutions to this. One is to let the heavily indebted enterprise go bankrupt—it can clean out the system, it can clean out overcapacity, but it can also lead to a downward spiral. So it is the option that China can take but which Japan didn’t during the 1990s, during the bursting of its debt bubble. Japan used government resources to bail out heavily insolvent firms. That prevented the systematic breakdown of the financial system, but those establishments were on life support. China might opt to swallow this cost, the bursting of its bubble. If that happens China might experience what happened to Japan after 1999—the slow death of the economy, not preceded by dramatic bankruptcy.
If every company got into trouble the Chinese government might be tempted to administer a big shock to the economy through bailout, but that will create long-term problems. The other solution is of course redistributive reform, which puts more purchasing power in the hands of the common people. This is happening to an extent. In recent data from China the only bright spot is that consumption and retail figures have risen. Consumption is already kind of picking up but it will take time because the economy has been so imbalanced in the past. It will take quite a long time for the consumption to become the driving force of the Chinese economy.
WPJ: In your book you talk about the rather unusual way in which China kept apart its rural and urban population during much of its recent history.
HFH: China’s long-term advantage, compared with the Soviet Union, was that by the time of market reform China was an industrial country whose population was still mostly rural. The USSR, on the other hand, urbanized. So later on, it was very difficult for it to develop labor-intensive industries, because of the small rural population. In China, the postal registration system kept the people in the countryside, allowed China to take advantage of this population when it started becoming a labor-intensive exporter.
But the rural population is also a disadvantage. This abundance of rural service labor kept the wage very low, and China has been stuck in this low-wage bracket for too long. Even with the recent increase in wages, the wage is less than in countries in a comparable stage of development. This low-wage regime definitely hurt consumption, and that’s why China finds it so difficult to move into a consumption-bent economy.
WPJ: How do you think the rural population of China will be affected by the boom coming to a close?
HFH: That’s a tricky question. In some cases, like in the aftermath of the Asian financial crisis, and also in the immediate aftermath of the 2007 crisis, many coastal export manufacturers and workers, if they were laid off, went back to the countryside to fall back on a piece of land that their family kept. So it’s a kind of a buffer for an unemployment crisis. But as you see in recent decades there’s also been a drive of a new generation of migrant workers from the countryside who no longer keep a connection to the land because of the investment boom. One part of the investment boom involved grabbing land from peasants in order to build. So many migrants have already lost their land, and many of them, after they went to the coastal urban areas to work in factories, stopped maintaining family ties to the countryside. So this time, when the boom comes to an end and urban jobs start disappearing, the buffer might no longer exist. This will add to the potential instability resulting from the economic crisis.
WPJ: What countries do you see following the trajectory of China, and what lessons do you think China’s experience might hold for these countries?
HFH: China’s exact experience is difficult to replicate in other places. But there are two groups of countries that have benefited from the China boom. One is commodities exporters—Brazil, South Africa, for instance—that have been doing very well in the last 10 years because of demand from China. Now they’re heading toward trouble, and becoming victims of the bursting of the China boom. But there are other Asian countries that are picking up lots of manufacturing from China’s slowdown. Most notable among these is Vietnam. These countries are a lot like China 10 or 20 years ago—they still have a lot of rural service labor. So if you talk about a country that might be following the China path, it might be Vietnam. Of course there are a lot of differences between these countries and China. Rural service labor in these countries, even though it may be large, is not as big as in China. China is unique in the sense that it had a hinterland with huge amounts of rural service labor to start with. So this kind of long-term reliance on low-wage labor and export manufacturing which fueled growth in the last 30 years is quite difficult to replicate in other places. And there are other countries like Bangladesh and Cambodia which are moving up as labor-intensive exporters—but they’re not going to experience a 20 or 30 year export boom either.
China, even in its mid-boom period, relied on the low wage dream for too long and didn’t do enough income redistribution. That’s the main lesson from the Chinese experience. It’s interesting the Asian Tigers are like China in many ways—their economic model relies on low-wage labor and export manufacturing—but at the same time, despite the fact that had authoritarian governments when their economies took off, they still did a lot of redistribution, and the wage of workers increased as economies grew. As countries like Vietnam and Bangladesh and Cambodia develop, they should learn from the Asian Tiger experience—the experience of Taiwan and South Korea—rather than from China’s experience. They should create a more equitable pattern of growth.
WPJ: In the book you talk about China’s “addiction” to U.S. treasury bonds. Is it possible for China to wean itself off this addiction, and what would that look like?
HFH: Foreign exchange reserves and treasury bonds are part of the China model of growth. China so far has relied on trade surplus and huge foreign exchange reserves. As a result of its commitment to maintain these reserves, it spends a lot on U.S. treasury bonds. I make this point because I’m trying to dispel the misconception that China’s purchase of U.S. treasury bonds is a generous act, that China might be doing a favor to the U.S. China’s purchase of U.S. treasury bonds, and more recently the selling of U.S. treasury bonds, is quite a voluntary act—it’s dictated by the structure of the Chinese economy.
WPJ: How do you think China’s investments in Africa, Latin America, Southeast Asia—south-south cooperation—will be affected by the end of the boom?
HFH: China’s export of capital and infrastructure-building capacity comes with huge political risks. China has political power so it’s very strong but it lacks capabilities on several fronts. For example there’s a lot of kidnapping of Chinese engineers and workers in Africa and sabotage of Chinese construction sites. And so when China exports companies and capital to these places, when it faces unrest, kidnapping, or even terrorist situations, it isn’t able to protect its investments. When China moves on to more unstable regions like Central Asia or Pakistan, then its investments look nice on paper, but when put into practice China’s not quite ready to tackle this problem. China pledges a lot of investments to Africa, for example, but in the end less than half of it really materializes when companies go there and find that local government is not really cooperative and there are local unrest problems and the labor force is restive. So far China is not politically able to protect its overseas operations, and China’s expansion of investment overseas is a hyperbole perpetuated by the media.
It will continue to try to invest in these and other areas through trial and error. But because of problem with currency and financial instability, the government is trying to stem capital flight by considering establishing capital control. So in the immediate term such a measure will hurt its overseas investment. It will become more difficult for companies to get money out of China, and we can expect a slowdown in the pace of these investments.
WPJ: You talk about a China that will try to become more assertive but which is held back by several factors—inequality, the dollar standard, and reliance on export and investment. How do you think this tension will play out?
HFH: It will intensify, and it’s a contradiction that will increase the instability between China and the region. China’s economy is not as mighty as before, and the political elite might start fielding nationalist sentiments as a diversion from economic frustrations. In turn, China will put on a more assertive posture in affairs with its neighbors. But at the same time China is becoming less capable by using its economic means to coerce labor into following its interest. This contradiction between capability and the decision to be more assertive will continue to intensify in the years to come, and it will add to the uncertainty regarding regional stability.
WPJ: What do you think will be done in China to rebalance the economy?
HFH: The ultimate long-term goal should be redistribution. China has wasted many opportunities to pursue more equitable economic growth, for example during the 2007 global crisis, during the 2008 global crisis. The original idea of the Chinese plan is to increase spending, to stimulate spending by personal households. But it didn’t work out that way—in the end most of the stimulus money went into investments like infrastructure construction, apartment construction, and so forth.
China doesn’t have more time to waste. It needs to increase the income and purchasing power of workers and peasants. One thing that has been successful in Brazil and many developing countries is a cash-transfer program. For China to do that it will require a lot of political will because it will hurt some vested interests. In democratic countries like India and Brazil it’s easier to do because it will gain votes for whoever is proposing and implementing this policy. But in China there’s no electoral system, so there’s less political will. But economically this kind of income transfer policy—which increases both income and purchasing power of the lower classes—will be better for China in the long run.
WPJ: Are there any events or series of events that might disrupt the predictions you make in the latter part of your book? Could the end of the boom not come to pass?
HFH: I think it’s inevitable. It is impossible for China to go back to the kind of boom it had before. The big question mark right now, now that the China boom is ending, is will it end in a more sustainable, equitable, slow growth, or in a financial disaster and economic collapse, in chaos? That’s still unknown. I hope it’s the former.
This interview has been edited and condensed for clarity.
Visit the Talking Policy archive page for more World Policy Journal interviews!
[Photo courtesy of Wikimedia Commons]