Tuesday, 23 April 2019

Why China maintained its strong economic growth

By John Ross

Introduction

China’s GDP growth in the 1st quarter of 2019 was 6.4% – the same as in the last quarter of 2018. This figure, and other economic data released at the same time, refuted predictions of sharp economic downturn in China made in the Western media.

The Financial Times headline regarding the first quarter’s results was ‘China GDP grows faster than expected in first quarter’ – by which it meant faster than the FT had expected! The Wall Street Journal’s headline similarly was ‘China Growth Beats Expectations… Many economists prepared for a weaker first-quarter performance’ – by which it meant economists the Wall Street Journal had paid attention to had expected a weaker performance.

In reality, however, there was no need to anticipate any unacceptable slowing of China’s economy provided that current trends were correctly understood.

First, appropriate short-term stimulus measures had already been taken and are working their way through the economy.

A significant credit stimulus has been given. Bank lending was 1.7 trillion yuan ($254 billion) in March compared to 0.9 trillion ($135 billion) in February. Total social financing increased by 2.9 trillion yuan ($433 billion) in March compared to 0.7 trillion yuan ($105 billion) in February. The effect of this stimulus was shown in the good data for March – with an 8.5% increase in industrial production, the best since 2014, and an 8.7% increase in retail sales. Exports in March rose by 14.2% year on year in dollar terms.

China’s official manufacturing PMI rose from 49.2 in February to 50.5 in March. The Caixin manufacturing PMI, more weighted towards smaller firms, rose from 49.9 in February to 50.8 in March. The official non-manufacturing PMI strengthened its expansion from 54.3 to 54.8.

This strengthening data in March is particularly good in light of the international slowdown being predicted by the IMF and other international economic organisations.

The IMF projects that GDP growth in the advanced economies as a whole will fall from 2.3% in 2018 to 1.8% in 2019. The slowdown in the largest Western economic centres is estimated to be even greater. The IMF projects that EU growth will fall from 2.1% in 2018 to 1.6% in 2019, a decline of 0.5%, and US growth will fall from 2.9% to 2.3% in the same period – a decline of 0.6%. As the growth rate of the Western economies is much slower than China this means that this slowdown in the US and EU is proportionately much greater compared to its starting point than in China.

But in addition to these short-term trends in China’s economy what is even more important for the medium term was the turnaround in fixed investment. The rise in fixed asset investment was 6.3% year on year – up from 6.1% in the previous month and from a low point of 5.3% in August 2018.

The reason this is crucial is set out in the article below. It shows in a detailed way that it is investment, and not any other major factor in the economy, which controls China’s rate of economic growth – as it does in other major economies. In addition to its medium-term effect it was the fall in fixed investment which led to the economic slowdown in the second half of 2018, and the upturn which led to the good results in the first quarter of 2019 and in March in particular. Quantitative analysis of the data therefore confirms that it is fixed investment which is the most powerful factor in China’s medium-term economic development and its short-term macroeconomic regulation.

The article below was written before the publication of the first quarter 2019 economic data in order to analyse current US policy towards China and China’s economic slowdown during 2018. Its conclusion was clear ‘policies which affect capital inputs into China’s economy, that is investment’ have the most powerful effect in ‘lowering, sustaining or raising China’s economic growth rate.’ But the new economic data for the first quarter of 2019 strongly confirms the analysis of the article. The analysis in the article therefore deals with both short term and medium-term trends in China’s economy.

The economic context of current US policy towards China

US trade policy towards China has not only economic but directly geopolitical goals. The latter is to attempt to slow down China’s economic development to the point where this creates problems for the Communist Party of China (CPC). As the Wall Street Journal, put it, openly hoping for this result: ‘China’s economy is slowing, which could dent support for Communist Party leadership.’. This key journal of US hard liners expressed fear that in the China-US trade negotiations there was a danger of: ‘a deal that won’t lead to fundamental changes by China, including reducing the power of its state-owned enterprises.’ This latter goal, however, was a means to another end. As the Wall Street Journal summarised it in another article regarding the aims of US anti-China hardliners, they were: ‘focussed on steps forcing China to give ground on issues it sees as crucial to maintaining the Communist Party’s rule.’

The Washington Post, one of the most influential US political newspapers, put it similarly urging a hard-line: ‘One of the main points of contention in the protracted trade discussion has been the role of China’s state-owned enterprises.’ It noted: ‘Trump is demanding… a sweeping overhaul of China’s economy a key condition for ending the U.S.-China trade war…. Securing… assent to abandon the economic model that lifted China… to become the world’s fastest-growing major economy would crown Trump’s confrontational diplomacy with success.’ Its conclusion was the same hope as the Wall Street Journal, that economic policies could be imposed by the US on China which would weaken the position of the Communist Party: ‘Trump’s hopes of winning genuine structural changes in China’s economic model are colliding with…. preserving Communist Party control.’

This geopolitical goal, disguised as an economic one, is adopted because US anti-China forces accurately understand that the CPC is the core of the People’s Republic of China (PRC) and the rejuvenation of the Chinese nation. Therefore, anti-China forces believe that, in the same way that the overthrow of the CPSU led to the collapse of the USSR, and a historic geopolitical catastrophe for Russia, if they could weaken the CPC then they would be able to impose a similar historic defeat on China – blocking China’s national rejuvenation.

Under those circumstances, when an economic policy is being pursued with a geopolitical goal which is against the interests not only of China but of the world, it is therefore important that there is an accurate understanding of economic forces which are operating. China can no more escape economic laws than any other country. If there is an accurate understanding of the economic forces operating, there will therefore be the greatest ability to deal with any negative pressures from outside China. Equally, if there is a misunderstanding of the economic processes operating, rhetoric or effort will not be able to avoid the negative consequences.

Valuable articles by other economists have concentrated on questions such as demand management while the focus of this article is the medium/long term supply side of China’s economy. These two approaches are not contradictory – both demand and supply sides of the economy must be analysed, and demand measures may in an important number of cases be more rapid in their effect. It should simply be noted that in the medium/long term the supply side of the economy dominates and in the shorter-term demand measures must necessarily operate through creating changes on the supply side. That is, to produce changes in economic growth, demand must lead to changes in economic inputs – changes in demand which do not affect supply side inputs may produce inflation or deflation, but they do not produce changes in economic growth. Therefore, it is also necessary to analyse the supply side in order even to assess the impact of demand side measures. This article’s aim is to therefore to analyse in a quantified way the fundamental supply side forces operating in China’s economy.

China’s per capita GDP growth is the fastest of any major economy

To avoid any misunderstanding in what follows, it is necessary to have a strictly balanced analysis of the situation of China’s economy. In 2018 China had the fastest per capita GDP growth of any major economy – a position it has held for decades. Figure 1 shows that on the IMF’s estimates China’s per capita GDP growth in 2018 was 6.1% compared to India’s 5.9%, 2.2% in the US, 1.8% in Germany and 1.4% in Japan. As analysed below the fact that China’s population growth is now significantly lower than India, the US, the UK, and Canada, to make comparisons simply among major and G7 economies, necessarily affects China’s ranking as measured by total GDP growth. But the well being of China’s population depends more on per capita GDP than on total GDP. To take one example, even if India’s official GDP figures are accepted, and they are not by many experts even in India, China’s per capita GDP growth is still faster than India’s – and China’s per capita GDP growth is almost three times as fast as the US, more than three times as fast as Germany, and more than four times as fast as Japan. Talk in the Western or Chinese media that China’s economy is in ‘deep crisis’ is therefore merely empty propaganda – as with similar claims made for decades. Furthermore there is no reason to believe that either in the short or medium term such a crisis will develop – China has the strongest macro-economic mechanisms in the world for preventing a severe economic slowdown, as analysed in my book 别误读中国经济 (‘Don’t Misunderstand China’s Economy’). The issues in this article therefore do not to deal with such non-existent ‘crises’ but primarily deal with clarifying medium/long term issues on which it is important to avoid conceptual or factual confusion.



Testing explanations of China’s economic slowing

There are currently three popular explanations of China’s economic slowing appearing in the media which are examined here against the test of facts.
  • That the slowing of China’s economy is due to lack of proper market mechanisms, a claimed negative effect of SOEs in the economy etc.
  • That China’s economic slowing is due to demographic factors, a slowing of the growth of the working age population followed by its slow decline.
  • That China’s economic slowing is due to a decline in capital inputs.

These explanations, as will be seen, are not mutually exclusive. However even when more than one process is operating it is crucial to find out which are the most powerful – as only by dealing with the most important of these can an adequate policy response be developed.

The conclusions arrived at from study of the facts are clear:
  • Demographic factors play some, but a small, role in the slowing of China’s economy.
  • Factors such as inefficient market mechanisms, or SOEs play essentially an insignificant role in China’s economic slowing – although maintaining the efficiency of market mechanisms is crucial to prevent an excessive slowing of China’s economy.
  • The overwhelmingly dominant factor in China’s economic slowing is the decline in capital creation and the fall in net fixed capital investment.

As these issues are crucial for China’s economic development this article examines these issues in a comprehensive way.

The necessity to use the most accurate data

To accurately analyse the processes operating in China’s economy it is vital to use real, and the most accurate possible, data. It is not unusual to see articles in parts of the media, which consists of ‘lists’ of issues without accurately analysing the real weight of each. It is indeed not unusual in parts of the media to see articles which contain no quantified data on trends in the economy but merely non-quantified claims. This is not merely wrong in principle but dangerous. Because by this method even if a real issue is pointed to, then if its real weight in the situation is not measured accurately this can lead to misleading judgements and consequences.

To explain this an analogy can be taken – comparing China’s economic development to a scientist analysing the path of a billiard ball across a flat table. If the scientist has ultra accurate measuring instruments it will be found that the trajectory of the ball is affected by innumerable forces – the gravity of the moon, the gravity of other planets, even the gravity of distant galaxies. The scientist is therefore stating something true if they say, for example: ‘I have found the trajectory of the billiard ball is affected by the gravity of the planet Mars.’ But, unfortunately, emphasising this true statement can lead to pseudo and misleading arguments. Because, if the scientist focuses only on the effect of Mars’s gravity on the billiard ball or says, ‘the trajectory of the ball is affected by the gravity of Mars, this is therefore the big issue to analyse’ or does not mention other forces, they are saying something fundamentally untrue – by far the most powerful force acting on the ball is the gravity of the planet Earth. Therefore, a statement which is true can be deeply misleading if its real weigh in the situation is not calculated.

This principle strongly applies to economic development. Innumerable factors affect economic growth, but it is necessary to accurately measure which are the most powerful and which less powerful. It was to accurately measure the weight of different factors in economic growth that the key tools of factual economic analysis were developed – growth accounting, national accounts statistics etc.

The practical consequences are obvious. If emphasis is placed on dealing with the less powerful factors in economic development, then even success in tackling these will not deal adequately with problems nor take advantage of economic opportunities. Only if the most powerful forces in economic development are dealt with can economic problems be solved, and opportunities successfully taken advantage of.

For this reason, this article concentrates on factually analysing the most powerful factors in the China’s economy – the policy implications are examined at the end of the article.

Growth accounting

The most accurate modern method to calculate the weight of different causes of economic growth is ‘growth accounting’ as originally developed by Robert Solow. Solow’s original formulation, however, suffered from two errors – it did not calculate the effect of changes in the quality of labour (education, training etc) and it did not calculate changes in the quality of capital (reflected in different rates of depreciation of capital). The necessary corrections to these measures were therefore subsequently introduced and adopted by the statistical services of the US, OECD and other international organisations.

Growth accounting analyses GDP growth in terms of three inputs – capital, labour, and total factor productivity (TFP). GDP is therefore:

GDP = capital inputs + labour inputs + TFP

TFP is defined as that part of GDP growth which cannot be explained by either capital or labour inputs.

Using a growth accounting framework, the real importance of popular explanations of the slowing of China’s economy can be easily factually analysed in terms of their effect on economic inputs.
  • If the argument is accurate that slowing of China’s economy is due to lack of proper market mechanisms, a negative effect of SOEs etc., this would show in a slowing of TFP growth – as market efficiency, the existence of SOEs etc are issues of efficiency/productivity not issues of capital or labour inputs.
  • If the argument that China’s economic slowing is due to demographic factors is accurate, i.e. due to negative shifts in the growth of working age population, this would be reflected in a slowing of labour inputs.
  • If the explanation is correct that China’s economic slowing is due to a fall in investment this would be reflected in a decrease in capital inputs.

To analyse the factual situation regarding these inputs into China supply side, Figure 2 therefore shows the trends in China’s capital inputs, labour inputs, and TFP since 1990. As China’s response to the international financial crisis, and the framework for analysing the slowing of its economy, may be considered as starting in 2009 therefore the focus is comparing the situation in that year with the latest available data.

The key facts from growth accounting are clear. Between 2009 and 2017 China’s GDP growth fell by 2.3%. Breaking this down in detail:
  • There was a small reduction in labour inputs, almost certainly primarily due to demographic factors, which diminished GDP growth by 0.2% a year. Calculated as proportion of the total slowing in China’s economy, 11.6% of the deceleration in GDP growth is due to the decline in labour inputs.
  • There has been essentially no change in TFP growth – calculated to two decimal points TFP contributed 3.23% GDP growth in 2009 and 3.26% in 2017 (the increase from 3.2% to 3.3% in Figure 2 is merely due to a changing in the rounding of decimals).
  • The reduction of capital inputs into China’s economy was from creating 5.1% GDP growth in 2009 to 3.0% GDP growth in 2017 – i.e. the fall in capital inputs reduced China’s GDP growth by 2.1%. The growth of GDP due to capital inputs fell by 41% between 2009 and 2017, accounting for 89.6% of the decline in GDP growth.

Therefore, evaluating the various popular theories regarding the slowdown in China’s GDP growth:
  • The overwhelming factor in the fall in China’s GDP growth was the decline in capital inputs – which accounted for almost 90% of the decline in China’s GDP growth.
  • There was a fall in labour inputs, primarily due to demographic factors, but this accounted for only slightly over 11% of the decline in China’s GDP growth.
  • There was no significant change in China’s TFP growth – i.e. there is no evidence that the slowdown in China’s economy was primarily due to deterioration in market efficiency, or a negative role of SOEs, all of which would show up as a decline in TFP growth.

In summary, the overwhelming reason for the slowing of China’s GDP was a fall in capital inputs, which accounted for about nine tenths of the decline; there was a contribution from demographic factors, accounting for approximately one tenth of the fall in GDP, and there was no significant indication the slowdown was due to a decrease in market efficiency or the role of SOEs – which would show as a decline in TFP.



Fall in labour inputs- demography

Having examined the overall factual data, applying the famous Chinese dictum of ‘seek truth from facts’, the significance of the individual processes affecting the slowing of China’s economy may now be seen.

The first is that it is true that demographic factors play a role in China’s economic slowing – but it is a small one, accounting for only slightly over one tenth of the decline in the growth rate. Therefore, arguments that the slowing of China’s economy are primarily due to demographic factors, in the most extreme version that ‘China will get old before it gets rich’ will not withstand factual examination. As will be noted below this conclusion from growth accounting is fully confirmed by national accounts calculations – leaving no doubt as to the factual situation.

In terms of a precise analysis, it would theoretically be possible to maintain labour inputs even within existing demographic trends – this could be achieved by methods such as raising the retirement/pension age, by increasing the education and skill of the labour force etc. However, these would either involve very major social changes, e.g. the retirement/pension age is extremely sensitive in all countries, or it would require very large expenditures – for example, in expanding the education and training system. Some measures in these fields are therefore to be anticipated but it is improbable that these could fully offset demographic trends.

Therefore, it is accurate to state that some slowing of China’s growth rate due to demographic factors will occur. But the factual data shows that this has been a relatively small factor in China’s economic slowing. Claims such as that ‘China will get old before it gets rich’ are highly exaggerated as the facts show that trends in labour inputs/demography account for only a small proportion of China’s economic slowdown.

A relevant conclusion from demographic trends, however, is that slow growth of China’s population confirms that the most relevant criteria for measuring China’s comparative economic development is per capita GDP. China’s 0.5% population growth in 2018, is significantly slower than India’s 1.3% or the US’s 0.7%. But the economic wellbeing of China’s population is more directly related to per capita GDP than to total GDP. Data showing that China has the most rapid per capita GDP growth of any major economy was given at the beginning of this article.

TFP

The application of up to date internationally approved methods of measuring the causes of economic growth, as noted above, shows clearly that it is a decline in capital inputs which is primarily responsible for the slowing of China’s economic growth – and not factors such as the role of SOEs or lack of market efficiency. Nevertheless, this does not mean that factors which affect TFP are not significant. Indeed, one of the reasons for China’s extremely rapid per capita GDP growth is its very rapid growth of TFP – by far the fastest for any major economy. Figure 3 shows that in 2017, the latest year for which there is data, China’s increase in GDP due to TFP growth was 3.3% compared to 1.8% in India, 1.3% in Canada, and 0.6% in Germany – the equivalent figure in the US was only 0.3%.


To confirm that China’s rapid TFP growth was not merely due to the specific situation in 2017, Figure 4 shows the annual average increase in GDP due to TFP growth for the major economies for the period 2009-2017. This shows no difference to the figure for 2017 for China of 3.3% and India at 1.8%. But the TFP growth in the G7 economies in this period was far lower – only 0.2% in Germany and 0.1% in the US, while in three G7 countries TFP growth was actually negative.

Numerous implications flow from these international comparisons. But one of the most important is that it is unrealistic to believe that China can accelerate its GDP growth by increasing its rate of TFP growth. On the contrary, China’s rate of TFP growth is so much higher than other major economies that it will take considerable effort to prevent China’s rate of TFP growth falling, with negative consequences for its overall economic growth rate. However, as the relation of TFP growth and economic growth is misunderstood in parts of China’s media, and it is suggested that a policy attempting to increase TFP growth is an alternative to one based on maintaining capital inputs, this issue will be examined in detail.


TFP growth is pro-cyclical

Analysing the slower TFP growth in the G7 economies during the period 2009-2017, compared to the sustained TFP growth in China and India, relates to a feature of TFP growth which is crucial for China. It is sometimes suggested in sections of the media that China should follow a strategy of slower GDP growth in order to focus on increasing TFP. There are several errors in such a concept, but one of the most significant is that it simply will not work practically because international studies, and analysis of China, show that TFP growth is ‘pro-cyclical’ – i.e. faster GDP growth leads to faster TFP growth while slower GDP growth leads to slower TFP growth.

This situation is clear from both international comparisons and data for China itself. The OECD publishes regular systematic international comparisons of TFP growth, all of which confirm that TFP is ‘pro-cyclical’ – i.e. TFP growth increases when the economy is speeding up and TFP growth declines when the economy is slowing down. Therefore, slowing China’s economy would be expected to lead to slower TFP growth not faster.

The OECD uses the term Multi-Factor Productivity (MFP), instead of the term TFP utilises by Solow and other creators of economic growth accounting, but the concept is identical. The conclusion of the OECD in its Latest 2018 report is unequivocal: ‘multifactor productivity growth (MFP) behaves cyclically, i.e. it increases in upturns and declines in downturns… The empirical evidence confirms the cyclical pattern of MFP. In fact, MFP follows GDP growth very closely, not only in terms of direction but also in terms of the size of the change.’ This confirms the finding of all previous OECD studies – as shown in the appendix to this article.

One reason some writing in the media has failed to note this ‘pro-cyclical’ behaviour of TFP is that it erroneously believes TFP represents ‘technological change’ – which would not be expected to show a cyclical behaviour. But such a view is a misunderstanding of what TFP measures. As the OECD notes in the 2017 edition: ‘After computing the contributions of labour and capital inputs to output growth, the so‐called multifactor productivity can be derived. It measures the residual growth that cannot be explained by changes in labour and capital inputs and represents the efficiency of the combined use of labour and capital in the production process. Multifactor productivity is often perceived as a pure measure of technical change, but, in practice, it should be interpreted in a broader sense… Changes in multifactor productivity reflect also the effects of changes in management practices, brand names, organisational change, general knowledge, network effects, spillovers from one production factor to another, adjustment costs, economies of scale, the effects of imperfect competition and measurement errors.’

TFP growth in China

It follows from these general international comparisons that allowing slowing of China’s economic growth will be accompanied by slowing TFP growth. But it is, of course, also necessary to check that this general international finding also applies to China.

Analysis of the correlation of TFP growth and GDP growth in China confirms that it is fully in line with the international findings of the OECD given above – i.e. the speeding up of GDP growth is correlated with increasing TFP growth, and a slowing GDP growth is correlated with slowing TFP growth.

Figure 5 shows the annual correlation between China’s annual GDP growth. This correlation, of 0.85 is extraordinarily high and fully in line with the OECD’s international conclusions. To cross check that this correlation is not due to purely short term factors, in the appendix to this article Figure 18 shows the correlation of China’s GDP growth with TFP growth using a three year moving average, and Figure 19 uses a five year moving average. The correlations shown, 0.81 in both cases, are also extraordinarily high. The conclusions of this are therefore clear. There is nothing unusual in China’s economic development – it is in line with international data. As with other countries its TFP growth is pro-cyclical. Therefore, any policy based on slowing China’s economy to attempt to accelerate TFP growth will not work as this will exert downward pressure on China’s TFP growth. On the contrary, it follows from the pro-cyclical character of TFP growth that it is an upturn, an acceleration in China’s economic growth, that aids increased TFP growth.



It may, of course, be noted that correlation is not the same as causation. The fact that fast GDP growth is correlated with fast TFP growth does not prove that fast GDP growth causes fast TFP growth, or that fast TFP growth causes fast GDP growth, or that some other factor(s) causes both fast GDP growth and fast TFP growth. But for present purposes it should be noted that it is unnecessary to establish the direction of causation. It is merely necessary to note that the correlation of the speed of GDP growth and of the rate of increase of TFP is over 80%. Such a high correlation means that faster TFP growth cannot be achieved without faster GDP growth.

Therefore, the perspective that there can be fast TFP growth without fast GDP growth is unrealistic – whether considered from the point of view of international comparisons, as studied by the OECD, or whether considered in the specific case of China. Even less realistic is the idea that TFP growth can be accelerated while GDP growth slows.

It should be clearly noted from this that it does not follow that slower GDP growth may not help in achieving other ‘quality’ targets. For example, China has achieved notable success in environmental improvements, in lowering pollution and reducing energy consumption per unit of GDP. Achieving these targets may be achieved through slower GDP growth. However, it is clear from both international comparisons and the experience of China that slower GDP growth will not aid in achieving high TFP growth. On the contrary both international experience and that of China shows slow GDP growth will lead to slower TFP growth.

Alternative estimates of growth inputs

It should be noted that the above data uses China’s official calculation of its growth rate. Attempts are sometimes made in the West to claim that China’s real GDP growth is systematically exaggerated and in reality is far lower than the official data – although top Western experts who have examined this such as Tom Orlik, whose Understanding China’s Economic Indicators is the most thorough study of China’s economic statistics, do not agree with this assessment. Most such Western claims are unsystematic and such methods therefore cannot be used to thoroughly examine China’s growth. However, one systematic attempt to examine China’s growth using modern growth accounting methods, with a claim that China’s growth is much slower than its official data, has been made – by Harry X. Wu of the Institute of Economic Research, Hitotsubashi University, Tokyo. This claims that between 2009 and 2017 China’s annual GDP growth fell from 7.9% to 3.7%. But this also finds that the overwhelming reason for this claimed slowdown was due to decline in capital inputs. Wu’s calculations show that between 2009 and 2017 annual GDP growth due to labour inputs fell by 0.1%, annual GDP growth due to TFP fell by 0.1%, but annual GDP growth due to capital inputs declined by 3.9%.

Therefore, even if it is claimed that China’s GDP growth is lower than official data, use of modern growth accounting data shows that the overwhelming reason for the slowdown in China’s economy is not due to changes in TFP or demography but due to a decline in capital inputs.
 
National accounts data

So far modern growth accounting data has been used for analysis – growth accounting is necessary if TFP is to be calculated. This showed that the overwhelming reason for the slowing of China’s economy is the decline in capital inputs. However, while growth accounting is the most accurate method of calculating contributions to changes in GDP there are strong reasons for cross checking the results with other statistical data:
  • If other data, for example national accounts statistics, corroborate the findings of growth accounting this would strongly confirm the certainty of the findings.
  • Growth accounting requires a great deal of data for computation. There is therefore a delay in such data becoming available – such data for China is only available to 2017. More data for China is, however, available from other statistical sources.
As other such data is less accurate than growth accounting, if changes that other statistics demonstrated were small in scale, or contradicted growth accounting data, then it might create difficulties to interpret the results. Fortunately for present purposes, however, examination of national accounts and other statistics shows trends which are not small in scale and are fully in line with growth accounts data – they therefore confirm the findings of growth accounting. Such confirmation of trends by two different statistical methods, of course, strengthens confidence in the findings. Therefore, in order to evaluate the impact of changes other statistical sources will also be considered

The limited effect of demographic changes

The first trend which is confirmed by use of statistical sources other than growth accounting data is the negative but relatively small effect of demographic changes.

It was already noted that China’s retirement/pension age is very low by international standards – which represents a policy/social choice. The international definition of working age population is 15-64 years. By this criteria Figure 6 and Table 1 show that between 2009 and 2017, the latest available data, China’s internationally defined working age population rose by only 1.3%, and China’s total population rose by 4.1%, whereas China’s GDP rose by 84.3%. China’s GDP therefore rose 66 times as fast as China’s working age population and 20 times as fast as China’s total population.

In summary, China’s population increase played a negative but small role in China’s GDP growth. Similarly, therefore, the decline in China’s working age population, which reached a peak in 2015 at 1.5% above its 2009 level and by 2017 had fallen to 1.3% above its 2009 level, will play only a small role in slowing of China’s economic growth. The conclusion of growth accounting data is therefore confirmed by other sources. Demographic factors will play a negative role in China’s GDP growth, but this effect will be small. Claims such as ‘China will grow old before it grows rich’ are based on gross exaggerations and have no serious factual basis. The primary source of any slowing of China’s GDP slowing must therefore be sought in entirely different factors than demographic ones. The fact that both growth accounting and other data leads to exactly the same conclusion leaves no doubt as to the factual situation.




Fall in Net Capital Creation

Turning to capital inputs, national accounts data fully confirms the fall in China’s capital inputs shown by growth accounting. Figure 7 shows that China’s net fixed capital creation (i.e. gross fixed capital formation minus depreciation) fell from 30.5% of GDP in 2009 to of 21.5% of GDP in 2016 (the latest available internationally comparable data) – this is a very large 9.0% of GDP fall.

Indeed, at a first approximation the relation between the reduction in China’s net investment and the slowing of the economy is even rather mechanical. In 2009-2016 China’s annual GDP increase fell from 9.4% to 6.7%. This is a reduction of 29% compared to the initial figure, while net fixed capital formation fell from 30.5% of GDP to 21.5% – a reduction of 29% compared to the initial figure.



Figure 8 fully confirms the extreme closeness of the correlation between the decline in China’s net fixed capital formation and the slowing in GDP since 2009. The linear correlation is 0.76, by itself extremely high. However, there is no necessity for a correlation to be linear and Figure 9 shows that the non-linear correlation is 0.81 – extraordinarily high.

The usual caveat that correlation by itself does not establish causation is irrelevant here, as the extremely high correlation shows that it is not possible to increase China’s GDP growth without increasing the percentage of net fixed capital formation in GDP – and that any decline in the percentage of China’s net fixed investment in GDP will be accompanied by an economic slowdown. The extremely close correlation between net fixed investment and economic growth shown by the national accounts data is therefore fully in line with growth accounting calculations analysed earlier. Capital inputs are overwhelmingly strongly correlated with China’s economic growth.




Gross capital formation and depreciation

If the reason for this sharp fall in China’s net capital formation is now analysed further Figure 10 shows this is due to two processes. On World Bank data:
  • Approximately one quarter, 24%, of the fall in the proportion of net fixed capital formation in China’s GDP is due to the decline in the percentage of China’s GDP devoted to gross fixed investment – which dropped from 44.9% of GDP in 2009 to 42.8% of GDP in 2016.
  • Approximately three quarters, 76%, of the fall in the proportion of net fixed capital formation in China’s GDP is due to a rise in fixed capital consumption (depreciation) in China’s GDP. This is strongly affected by the rise China’s capital stock – capital consumption as a percentage of China’s GDP rose from 14.4% of GDP in 2009 to 21.3 of GDP in 2016.

It should be noted that an increase in consumption of fixed capital/depreciation in GDP is a normal process resulting from an increase in and modernisation of capital stock – it also occurs in the US. However, the increase in the percentage of GDP ascribed to capital consumption/depreciation in China is extremely high in terms of international comparisons. It would therefore be important for studies to be carried out to see if this figure is accurate or exaggerated. Nevertheless, the present data is so high that it indicates that capital consumption/depreciation is a significant factor in China fall in net capital creation – making it important to analyse net fixed capital creation and not only gross investment.



The most recent trends in fixed investment

Data for China’s gross fixed capital formation using national accounts data is available to 2017, and for net capital formation to 2016. However, data for 2018 for these categories will not be available for some time. Nevertheless for 2018 statistics for year on year changes in urban fixed asset investment leave no doubt that the same trend has continued. Figure 11 shows that the annual increase in China’s fixed asset investment fell from 7.2% in December 2017, and 8.1% in December 2016, to 5.9% in December 2018. As this latest figure is significantly below China’s growth of GDP at current prices in 2018 it is extremely likely that the percentage of fixed investment in China’s GDP declined in 2018 – continuing the trends in a fall in capital inputs shown in national accounts data. This trend then turned around in the first quarter of 2019, with a rise to a 6.3% year on year increase in fixed investment. Underpinning the improved economic trends in that period.


Saving

Turning from changes in fixed investment to overall trends in China’s capital creation/saving, which is necessary to finance investment, the same trends can be seen – only in an even more extreme form. It should be noted for clarity that throughout this article by ‘saving’ is meant China’s total savings – the sum of household saving, corporate saving, and government saving – and is not only household saving.

Figure 12 shows that China’s net saving, which is equivalent to China’s net capital creation, fell from a peak of 39.3% of Gross National Income (GNI) in 2007, to 36.7% of GNI in 2009, to 24.9% of GNI in 2016 – i.e. a decline of 11.8% of GNI in 2009-2016, and 14.4% of GNI in 2007-2016. This extremely large fall in the percentage of net saving in China’s economy, a large decline in the capital supply, is necessarily a strongly negative supply side shock for China’s economy.



Analysing in greater detail this major fall in China’s net saving, i.e. net capital inputs, again shows this is due to two processes:
  • China’s gross saving fell from 51.2% of GNI in 2009, and a peak of 51.8% of GNI in 2007, to 46.2% of GNI in 2016. This accounted for 42% of the fall in China’s net saving between 2009 and 2017.
  • Capital consumption has risen from 14.5% of GNI in 2009, and 12.4% of GNI in 2007, to 21.3% of GNI in 2016. This accounted for 58% of the fall in China’s net saving between 2009 and 2017.
As already noted, estimates of savings/capital consumption are difficult to calculate but the changes shown are so large as to leave no doubt as to the general trend. There has been a sharp reduction in the proportion of China’s economy devoted to net capital creation.

This measured trend, paralleling the decline in capital inputs measured by growth accounting, is equivalent to a severe negative supply side shock to the economy. It is as though the petrol was drained out of the fuel tank of a car, making it inevitable that the car will not run for the same distance as before. Anyone expressing surprise that the car will not run as far as before is simply going against the laws of physics. Put in economic terms what has occurred is a reduction in the capital supply to China’s economy which is clearly confirmed by both growth accounting and national accounts data. As capital is one of the key inputs to the economy, such a reduction will necessarily produce economic slowing.


The correlation of China’s saving and economic growth

It was earlier shown that the correlation between China’s net fixed investment and its rate of GDP growth was extremely high. Net fixed investment is that part of China’s capital creation used for increases in fixed investment/capital stock in China. However, while fixed investment accounts for by far the largest part of use of China’s savings (gross fixed investment is approximately nine tenths of the use of China’s capital creation) small parts are used for other purposes – accumulation of inventories or as the surplus in China’s balance of payments. Therefore, for exactitude it is important to also study the correlation between China’s total capital creation/saving and GDP growth.

Such analysis is extremely revealing. It shows that the correlation between China’s capital creation/saving and its economic growth is even closer than between net fixed investment and economic growth. Furthermore, there is an extremely strong correlation between China’s gross savings and its GDP growth – whereas the correlation between China’s gross fixed investment and economic growth is low. This is statistically highly useful as it avoids the issue noted above that the calculated consumption of fixed capital/depreciation in China is very high compared to other countries. The fact that an extremely strong correlation of China’s gross capital creation/saving with GDP growth exists, as well as between net capital creation/saving and GDP growth, means that any complications of calculating capital consumption/depreciation can be avoided. Analysing first the linear correlation of gross saving and economic growth this is shown in Figure 14. This correlation of 0.84 is extremely high.



However, as already noted there is no necessity for a correlation to be linear. Figure 15 shows that the non-linear correlation is of gross saving and 0.87– an extraordinarily high correlation. As before the caveat that correlation does not establish causation is irrelevant as the extremely high correlation shows that it is not possible to increase China’s GDP growth without increasing the percentage of gross saving in GDP – and that any decline in the percentage of gross saving in GDP will be accompanied by an economic slowdown.


Turning to net saving, Figure 16 shows that the linear correlation of the percentage of net saving in China’s GDP with its economic growth is 0.88 – an ultra-close connection.
 

Turning to the non-linear correlation of the percentage of net saving in China’s GDP and its economic growth Figure 17 shows that this is 0.91 – an extraordinarily high correlation.

Once again the usual caveat that correlation does not establish causation is irrelevant as this extremely high correlation shows that it is not possible to increase China’s GDP growth without increasing the percentage of net saving in GDP, and that any decline in the percentage of net saving in GDP will be accompanied by an economic slowdown.


Capital creation and China’s economic growth

As it may be seen that the correlation between China’s capital creating/savings and economic growth is even closer than between net fixed investment and economic growth, it may be asked why this is the case?

This difference is not of crucial importance for economic policy, as both correlations are extremely high, confirming that it is capital creation which is the dominant issue in China’s economic growth. But it may be noted that China’s total supply of capital, measured by capital creation/savings affects other features of the economy than fixed investment. For example, a reduction in capital creation will necessarily produce negative consequences in specific markets – upward pressure on interest rates, decreasing profitability of companies, increase in leverage due to the fall in company profitability etc. These other negative effects of the fall in capital creation/saving may explain why the correlation of this with China’s economic growth is even stronger than the relation to fixed investment.

Conclusion

As emphasised at the beginning of this article there is no ‘deep crisis’ in China’s economy – China’s per capita GDP growth continues to be the fastest of any major economy in the world. This is the crucial international framework to understand. Within that overall perspective the conclusion of both modern growth accounting and national accounts measures regarding why China’s economy has slowed are the same.
  • The overwhelming cause of the slowing of China’s economy is a fall in capital/investment creation. This is shown in growth accounting by the fact that almost nine tenths of the decline in GDP growth is due to a fall in capital inputs. In national accounts data it is confirmed by the extraordinarily high correlation between net fixed investment and GDP growth of 0.81, of a correlation between gross saving and GDP growth of 0.87, and a correlation between net saving and GDP growth is 0.91 – all extraordinarily high figures.
  • Demographic trends will reduce labour inputs, slowing the economy, but this effect only accounts for a small part of economic deceleration – macro-economic data shows that increased labour inputs created only a small part of China’s growth, while growth accounting shows a fall in labour inputs accounts for only about one tenth of the slowing of China’s economy.
  • Growth accounting data shows that China’s TFP growth is high in terms of international comparisons – meaning it is very unlikely that China’s GDP growth can be accelerated by an increase in TFP, but that measures will have to be taken to ensure China’s TFP growth does not fall.

It is necessary to be aware of the full scale of this negative supply side shock in terms of capital creation. The decline in China’s net fixed capital investment is 9% of GDP on World Bank data. Even if the statistics on capital depreciation merit further evaluation, given their extremely high level by international standards, even measures of gross savings, which do not rely on calculation of depreciation, has fallen by 5.0% of GDP. Either figure is a severe negative supply side shock – confirming the growth accounting data which shows a sharp fall in capital inputs.

To return to the beginning of this article, the focus here is on medium/long term factors in China’s economic development. This is not contradictory to a shorter-term emphasis on demand management or supply side measures already taken to close excess capacity. However, to note again, measures affecting the demand side of the economy must necessarily operate through their impact on the supply side i.e. to produce changes in economic growth demand must create changes in labour inputs, capital inputs or TFP. Changes in demand which do not affect the supply side inputs may produce inflation or deflation, but do not produce changes in economic growth.

The consequences of this factual situation of the weight of factors in China’s economic development for economic policy are clear. As for reasons already stated TFP will be at best neutral, and demographic trends will be moderately negative, the only key input which can positively influence China’s growth rate is the level of capital inputs. This means that policies which affect capital inputs into China’s economy, that is investment, can have a powerful effect in lowering, sustaining or raising China’s economic growth rate.

This quantitative situation therefore also necessarily determines the practical efficacy of measures designed to limit China’s economic slowdown and/or to carry out any economic stimulus.
  • Measures to maintain or increase market efficiency are important to try to sustain China’s rate of TFP growth but they not quantitatively able to prevent an economic slowdown – for the reasons given it is extremely improbable China could increase its level of TFP growth given its present high level. Furthermore, a strategy, which is sometimes proposed that China should allow its economy to slow but increase its TFP growth will not work for the quantitative reasons outlined – TFP growth is pro-cyclical and therefore a slowdown in economic growth will lead to a slowing of the TFP growth.
  • Demand side measures to increase consumption will only be successful, for the reasons already outlined, if they produce changes on the supply side – that is, primarily if they affect capital inputs.
  • Measures to cut company taxation are useful in maintaining employment and other goals but for the quantitative reasons analysed above they will only translate into faster economic growth if they lead to an increase in capital inputs – that is investment.
  • In summary, given the quantitative situation analysed with demography/labour inputs and TFP, only measures which directly increase capital inputs, that is either state or private investment, will be significantly beneficial to the economic growth rate.

Practical application of policy will necessarily confirm the trends analysed. While measures such as increases in the retirement/pension age, and increases in training and education, may decrease the negative effect of demographic changes no significant body of opinion believes that a significant increase in China’s growth rate can take place due to an increase in labour inputs. There are those who argue that China’s growth could be increased due to an increase in TFP, but for the quantitative reasons given this will not be successful. For quantitative reasons the only method that will stabilise/increase growth will be an increase in capital inputs.

Postscript

This article was written to analyse in detail the slowing of China’s economy in the latter part of 2018. But its conclusion, that it is the level of investment which controls the rate of growth of China’s economy, applies equally to the good results for the first quarter of 2019. The fall in investment in 2018 led to economic slowing, the rise in investment in the first quarter of 2019 led to stabilisation in GDP growth and acceleration in other economic measures. Therefore, from both angles the data fully factually confirms that it is fixed investment which is the most powerful factor affecting China’s speed of economic development.

Appendix

This appendix is intended for economic specialists – non-specialists should know that it does not add to the main conclusions of the article. It merely indicates further substantiating evidence and explanations regarding the points in the article.

First regarding growth accounting, it is important to note the official improvements in the methods of measuring economic growth and its causes which have been formally adopted by the UN, OECD, and other statistical agencies – it is a serious problem in some literature in China that methods of measuring economic growth and its causes which are no longer accepted are used. The reasons for these changes in the official methods of calculating economic growth and its causes are analysed in detail in 为何联合国、经合组织与美国正式改变其经济增长成因测算方法? (The Copernican Revolution in Analysis of Economic Growth is Very Significant for China). But the clearest fundamental error which had to be corrected compared to former methods of analysing the causes of economic growth was that these did not calculate changes in the quality of capital and labour inputs. This meant in the case of labour, for example, that one hour of work by a South Korean peasant in 1953, who may have been illiterate, was calculated as equivalent to 1 hour of work by a South Korean engineering PhD, and very rapidly depreciating assets such as ICT equipment were not treated differently from assets which depreciated over very long periods of time. These errors are corrected in the new internationally approved methods of calculating the causes of economic growth by:
  1. Calculating separately labour quantity (the number of hours worked) from labour quality (the skill, educational etc qualification of labour);
  2. Using the category of ‘capital services’ to measure the contribution of different types of capital investments (in the OECD methodology eight categories of capital assets are used ‘computer hardware, telecommunications equipment, transport equipment, other machinery and equipment and weapons systems, non-residential construction, computer software and databases, research and development and other intellectual property products.’

In this article data calculated according to these new and approved methods of calculation are used. Regarding the correlation of GDP growth and TFP growth the correlations for single years was shown in the article. However, it is useful and important to show that the same correlation exists over not merely the short but the medium term. Figure 18 therefore shows a three-year moving average for the correlation of TFP and GDP growth and Figure 19 shows a five-year moving average. The three-year correlation is 0.81 and the five-year correlation is also 0.81. Both correlations are extremely high. The caveat that correlation does not establish causation is irrelevant as this extremely high correlation shows that it is not possible to increase China’s TFP growth while reducing China’s rate of GDP growth – that is a strategy of ‘lower GDP growth and higher TFP growth’ will not work.




This finding for China is entirely in line with international experience. In order to avoid overburdening the text with detail for non-specialists only the 2018 OECD finding was cited. However, this is entirely in line with all OECD studies on the issue. To show this reference to the previous OECD studies are therefore given here.

In 2012 the Compendium of Productivity Indicators noted: ‘the empirical evidence confirms the pro-cyclical pattern of MFP. In fact, MFP follows GDP growth very closely, not only in terms of the direction but also the size of the change.’ (OECD, Compendium of Productivity Indicators 2012 p11.) And therefore ‘MFP behaves cyclically, i.e., it increases in an upturn and declines in a downturn.’ (OECD, Compendium of Productivity Indicators 2012 p58.)

The 2013 Compendium of Productivity Indicators had the same finding: ‘multifactor productivity growth (MFP) behaves cyclical, i.e., it increases in an upturn and declines in a downturn. ‘ (OECD, Compendium of Productivity Indicators 2013 p62).And: ‘The empirical evidence confirms the cyclical pattern of MFP. In fact, MFP follows GDP growth very closely, not only in terms of the direction but also in terms of the size of the change. ‘ (OECD, Compendium of Productivity Indicators 2013 p62)

The 2015 Compendium of Productivity Indicators similarly concludes: ‘MFP appears to have moved in a pro-cyclical way’ (p30) And: ‘multifactor productivity growth (MFP) behaves cyclically, i.e. it increases in an upturn and declines in a downturn.’ (OECD, Compendium of Productivity Indicators 2015 p64)

The 2016 report notes ‘The empirical evidence points to the recent slowdown in labour productivity being in at least in part explained by its pro-cyclical pattern, particularly for MFP’ (OECD, Compendium of Productivity Indicators 2016, Kindle Location 61) And: ‘multifactor productivity growth (MFP) behaves cyclically, i.e., it increases in upturns and declines in downturns.’ OECD, Compendium of Productivity Indicators 2016 (Kindle Location 1704-1705).

The 2017 OECD report again finds: ‘multifactor productivity growth (MFP) behaves cyclically.’ (OECD, Compendium of Productivity Indicators 2016 (Kindle Location 1704-1705).And that: ‘The empirical evidence confirms the cyclical pattern of MFP. In fact, MFP follows GDP growth very closely, not only in terms of the direction but also in terms of the size of the change.’ (OECD, Compendium of Productivity Indicators 2017 (Kindle Location 1532).

The OECD’s factual finding is therefore clear and unequivocal. Slowing of GDP growth leads to a slowing of TFP growth. A strategy of ‘slower growth to achieve higher TFP increases’, other things being equal, therefore won’t be successful – a slowing of GDP growth will be associated with slower TFP growth.

* * *

This article was previously published on Learning from China and originally in Chinese at Guancha.cn.

Tuesday, 19 March 2019

China’s plans for Green Growth

By John Ross

‘People centred development’, including special emphasis on ‘green growth,’ was a central theme of this year’s annual China’s National People’s Congress (NPC) – its legislative body. The focus of the NPC, together with the Chinese People’s Political Consultative Conference (CPPCC) which is held simultaneously, is always primarily domestic. However, China’s domestic agenda necessarily impacts on its international relations. Such international impact, in turn, reciprocally affects China itself – it is important for China that other countries do not pursue protectionism, that other countries pursue policies congruent with China’s in problems that can only be solved internationally etc.

Key policies at this year’s ‘two sessions’ will particularly have a major international impact due to the current international situation – which is seeing a slowdown in the Western economies, increasing concern within Western countries about poverty and social inequality, and increasing international anxiety and public agitation about climate change. China’s economic growth, its policies on poverty, and the policies adopted by China on the environment in general and climate change in particular will therefore have international impact. This correspond to a reality that China, in correlation with its growth target, and its poverty reduction, has set internationally leading targets for dealing with climate change and environmental issues. In this framework, this article, therefore, analyses this interrelation between China’s domestic priorities and international trends.

To avoid the suggestion of using sources excessively favourable to China all economic data used here, unless otherwise stated, is not taken from China but from the IMF. As the data for 2019 are projections if the differences they showed between China and other countries were small no great reliance could be based on such figures. However, as will be seen, the differences are not small, but the outperformance of China compared to the Western economies is extremely large – therefore, during 2019 small variations of economic performance from the IMFs projections will not affect the fundamental situation. For reasons analysed in my book Don’t Misunderstand China’s Economy, while in the past IMF projections for the Western economies have been too optimistic the current ones by the IMF are in general realistic – with one key exception noted below.

China’s growth rate

China set its economic growth target for 2019 at 6.0%-6.5%. To understand the global impact of this it is important to give an international comparison for the word’s three largest economies – the US, China and EU. China is expected to grow this year approximately two and a half times as fast as the US and more than three times as fast as the EU.

China’s performance is of particular significance as it will be set against the background of an overall slowdown of the Western economies. The IMF in its latest forecast in January projects that growth in the advanced Western economies as a whole will fall from 2.3% in 2018 to 2.0% in 2019, in the US it will decline from 2.9% to 2.5%, and in the Eurozone from 1.8% to 1.6%. Even if the IMF’s projection of China’s growth, of 6.2% in 2019 were accurate, and that is towards the bottom end of the government’s target range, this means the IMF projects that not only will China be growing two and a half times as fast as the US but the economic slowdown in the US will be more severe in relative terms than in China. Compared to this year the US economy would slow from 2.9% to 2.5%, or by 14% of the previous figure, while China would slow from 6.6% to 6.2%, that is by only 6% from the previous figure.

China’s growth target

These comparative international trends can be seen even more clearly if they are considered in per capita terms. China’s population growth is slower than other major economies – China’s population grew in 2018 by 0.5% compared to 0.7% in the US and 1.3% in India. Therefore, a part of US and Indian total GDP growth, compared to China, is simply due to more rapid population growth. However, the increase in the wellbeing of any country’s population is determined not by total GDP but by per capita GDP.
Even if India’s official growth figures are accepted, which many experts even in India would not do, then in per capita GDP terms, as shown in Figure 1, China’s growth in 2018 was the fastest for any major economy – 6.1% compared to 5.9% in India and, considering Western economies, far faster than the 2.4% in the US, 1.8% in Germany, and 1.4% in Japan.

Figure 1

 
Making a comparison to major Western economies for 2019, the IMF projects China’s per capita GDP growth will be 5.7% compared to 1.9% in the US and EU, 1.8% in Germany, and 1.3% in Japan. That is:
  • China’s per capita GDP growth will be three times as fast as the US.
  • China’s per capita GDP growth will be three times as fast as the EU, and more than three times as fast as Germany
  • China’s per capita GDP growth will be more than four times as fast as Japan.
To summarise, the conclusions of this are evident:
  • First, even at the level of total GDP growth, the attempt by sections of the Western media to claim that China’s economy is in ‘deep crisis’ is pure nonsense – China’s economy will grow two and a half times as fast as the US and three times as fast at the EU.
  • Second, the contrast in per capital terms is even greater – China will grow three times as fast as the US or EU.
  • Third, as the Western media is at present full of false propaganda about ‘severe slowing’ and ‘deep crisis’ in China’s economy, the slowing of the Western economies, which is already receiving increasing attention, will provide a very favourable opportunity to show once again the falsity of claims about China
Finally, from the point of view of explaining this situation internationally, it is likely to be very useful, and objectively correct, for China to emphasise per capita trends as well as total GDP trends – as the fact that China’s population growth is significantly slower than other major economies conceals some of the real international contrasts in development.
Contributions to world growth
From the viewpoint of the standard of living of China’s population per capita development is the most important. However, from the viewpoint of other countries’ trade and investment, and therefore their objective interest in interaction with China, it is the total size of China’s economy and growth which is decisive. In order to assess the international impact of the NPC decisions, therefore, it is necessary to analyse the projected contribution of China to world growth in comparison to other countries.
Calculated in PPP terms, which reflects the real increase in the number of sales of goods and services, the IMF projects that China will account for 27.2% of world growth in 2019 compared to 12.3% for the US and 11.8% for the EU. That is, China’s contribution to world growth in these terms will be more than twice that of the US and EU – or put in other terms, China’s contribution will be as large as the US and EU combined. This is, of course, vital for companies aiming to sell into China’s market.
Calculations in current exchange rates by the IMF are unclear as, for reasons which it does not justify, the IMF makes the extremely strange assumption for 2019 that the RMB will undergo a significant devaluation against the dollar. To be precise, the IMF projects that while China’s GDP in constant price terms will increase by 6.2%, and in current RMB prices will increase by 8.6%, in current dollar terms China’s GDP will only increase by 5.3% – which could only be explained by a significant RMB devaluation. This exchange rate projection is neither in line with current trends nor with reports of an exchange rate agreement between China and the US in current trade negotiations. However, this appears to be an anomaly for 2019 in that the IMF estimates that over the whole five-year period 2018-2023 at current exchange rates China will account for 26% of world growth and the US and the EU will each account for 17%. This is over the next period as whole China’s contribution to world growth at current exchange rates will be more than 50% greater than either the US or EU.
In summary, in terms of sales over the next period, China’s economy will grow more than twice as fast as the US or EU and even at current exchange rates it will grow more than 50% more rapidly – providing a firm basis on which to attract other economies to increasing economic interaction with China.
Total GDP growth is not the target
But while it is significant to note projected growth rates, China has rightly emphasised that GDP growth cannot by itself be the target of policy. The correct goal is ‘people centred development’, that is the improvement of the overall living conditions of its people – including in relation to problems that by their nature can only be solved internationally.
China has long led the way globally in speed of increase of living standards, which for the last 40 years have been by far the fastest in any major economy, and in poverty reduction – since 1978 China has accounted for almost three quarters global fall in the number of those living in World Bank defined poverty. China’s pledge to entirely eliminate absolute poverty by 2020, repeated at this year’s NPC, remains an inspiring goal for all humanity.
These issues also illustrate the link between economic development and human well-being – growth of per capita GDP is not just a question of ‘concrete and steel’, i.e. physical production. Economists know that average life expectancy is the best indicator of overall human living conditions as it sums up in a single figure all positive (reduction of poverty, education, good health care, environmental protection) and negative (poverty, bad health care, lack of education, environmental damage) trends. Internationally more than 70% of differences in life expectancy between countries are explained by differences in per capita GDP.
Regarding China its life expectancy has continued to increase steadily – an indicator of its overall improving average social conditions as well as the success in poverty reduction. But it is therefore an extremely disturbing trend that in the US life expectancy has now been falling for three years and in the UK life expectancy has also started to decline – such a situation has not existed in these countries for decades. This clearly can only reflect a deteriorating social situation which, in turn, underlies heightened social and political conflict in these countries – the political turmoil continuing to surround the Trump administration, the economically irrational Brexit decision in the UK etc.
Some people in the West now argue that changes in distribution of income within advanced economies, particularly the US and UK, where this is extremely unequal, could ensure the maximum social progress even without economic growth. But whatever position is taken on this regarding the West, where it is becoming a hot debate in some circles, in developing countries such as China this is impossible. Continued development of per capita GDP, in the framework of ‘people centred development’, is therefore vital for the well being of China’s population and its growth target maintains this.
China’s methods of poverty reduction are of direct concern in developing countries. But even in advanced economies, with a higher per capita GDP, the difference of methods used by China at different stages of development for eliminating poverty are of interest – and likely to win widespread support.
To lift more than 800 million people out of World Bank defined poverty, as China did after 1978, China necessarily relied on overall economic growth – no targeted measures would have been powerful enough. But even with economic growth the last few tens of millions of people living in absolute poverty in China could be left there – because they are in very inaccessible parts of the country or for other reasons. Therefore, for final success in eliminating poverty, China has to rely on targeted measures – which require conscious directed state policy as set out by the NPC. In both the US and UK, which rely overwhelmingly on the ‘invisible hand’ in the economy, key measures of poverty have actually increased in the last period.
China’s achievements in poverty reduction are so overwhelming ahead of the rest of the world that this should be a central part of its public image and presentation – in the West even anti-China politicians are forced to praise China for its unparalleled success in poverty reduction.
Ecological civilization
But in addition to immediate struggles to raising living standards, to provide social protection, to extend health care, and to eliminate poverty, in the present world ‘people centred development’ must also centrally include the fight against environmental degradation and against climate change. The latter, in particular, is a literally deadly threat to the whole future of humanity. These goals require building an ‘ecological civilization’, as President Xi Jinping has put it.
The effects of global climate change are already clear. The world is already seeing record-breaking temperatures, extreme heatwaves, storms, floods, and wildfires leaving a trail of death and devastation – and this situation will become progressively worse as global temperatures rise. As the UN’s Antonio Guterres has said, scientists have warned about global warming for decades, but ‘far too many leaders have refused to listen [and] far too few have acted with the vision that science demands.’
This extremely dangerous threat to the whole of humanity is therefore being increasingly reflected in generating social and political movements internationally. In the US recognition of the danger of climate change is extremely widespread with those concerned on this issue ranging from multi-billionaires such as former Mayor of New York Michael Bloomberg, through entire US states such as California, to the ‘Green New Deal’ put forward by many political figures which calls for concerted action on climate change and commands widespread popular support. Young people, who will face the worst consequences of climate change during their lifetimes, have started to become increasingly active – with in Europe an international movement of school strikes against climate change. Leaders in Pacific Islands term have termed this threat a literal genocide – their countries will physically disappear beneath rising sea levels if action is not taken.
The effective fight against climate change requires both correct policies and huge technological and industrial capacities and the objective situation is that China alone possesses both. The emphasis on ‘ecological civilization’ at the NPC is therefore particularly important given that, unfortunately, the Trump administrations in the US is continuing to undermine the Paris Climate Agreement and has made clear that the US will withdraw from it when the rules allow President Trump to do so in 2020.
The NPC decisions go in exactly the opposite direction to the regrettable US deeply irresponsible policies. They are therefore both in the interests of the Chinese people and in line with majority, and an increasing majority, of international opinion. More specifically, in a key target the work report projects China’s energy consumption per unit of GDP to continue to fall by about 3% in 2019. Regarding key forms of environmental pollution sulfur dioxide and nitrogen oxide emissions will drop by 3%, and the concentration of fine particulate matter (PM2.5) will continue to decline in key areas. This year’s chemical oxygen demand and ammonia nitrogen emissions will drop by 2%.
Progress made by China in tackling pollution in the last years is also regarded internationally as striking. A few years ago, as was recognised not only in China but internationally, major Chinese cities had very serious problems of smog and pollution – with Beijing being the most widely cited case internationally. But in 2018, as even Ian Bremmer, head of the Eurasia Group, the leading Western ‘risk evaluation’ company, and a severe critic of China noted, Beijing is no longer even in the top 100 most polluted cities in developing countries – regrettably seven out of the ten most polluted cities are now in India. This is not at all to underestimate how much still much remains to be done to fight against climate change and tackle pollution, but China is making a decisive turn to environmentally favourable policies while other countries, notably the US, are retreating from them. Furthermore, China is having measurable success. This will necessarily have an impact on international opinion.
Convergence with international forces
On the issue of climate change, therefore, China’s policies are objectively aligned with an extremely wide range of forces internationally, ranging from billionaires to school children, on what an increasing number of people in the West consider the most important issue facing humanity. This creates important possibilities for China to create alliances with very broad groups – even some who are normally hostile to China but who consider such differences less important than dealing with what they see as a fundamental threat to humanity.
The context for this is that the 2020 international climate talks are supposed to agree new national commitments consistent with constraining global temperature rise ‘well below two degrees’. This is given greater emphasis by the recent conclusion of the United Nation’s Intergovernmental Panel on Climate Change’s (IPCC) that the only science-based target to tackle the climate crisis is to constrain global average temperature rise below 1.5 degrees above the pre-industrial average – although this is not yet accepted officially as an international target.
Overall, while China’ comprehensive national strength is rising it cannot yet play an all-round leading role on international issues – views such as that China’s comprehensive national strength is already equal to the US are incorrect, and views such as that the dollar can be replaced as the leading international currency in any short/medium term period are also unrealistic. But as China’s comprehensive national strength increases it will be able to take a leading international role on certain issues. Climate change is one of them – most developing countries would welcome China playing such a role and it may be possible for China to come to an agreement with the EU, leaving the present administration in the US relatively isolated on this issue.
This trend directly coincides with increasing concern in the West about climate change and an increasingly open support for China’s policies in several fields related to this. Western experts note that China is already ahead of its target of reaching peak emissions by 2030 – recent Western estimates are that this will be achieved in 2025 or even slightly earlier. Interestingly the target date that would be required to meet a global target of 1.5 degrees is only slightly earlier – 2022.
To take specific areas, China is already by far the world leader in electric vehicles for public transport. Shenzhen is world’s first city to have a 100% electric bus fleet and this is extremely large – almost 16,000 vehicles. The next nine cities in the electric bus global top ten are also all in China and have thousands of vehicles. To show the scale of China’s lead, the next highest cities in the world after China are London and Santiago in Chile with roughly 200 each. China is also by far the world leader in urban cycle hire.
Similarly, the ‘C40 Cities – Climate Leadership Group’, which joins together 90 leading cities internationally, representing more than 650 million people and including one quarter of the global economy, asks all its cities to commit to all new buildings being zero carbon by 2030. China can technically achieve that.
There are numerous ‘hot’ issues to be considered in the coming international climate change discussions – – regarding which a strictly objective dialogue is crucial. For example, emissions from China’s own coal powered electricity generation is scarcely rising – it went up only one percent last year, but pro-China Western experts, who are overall strong supporters of the Belt and Road initiative, are worried about the effect of new coal power stations that are part of the Belt and Road initiative.
On the other hand, twenty years ago, under Clinton and Gore, the US forced the UN to adopt a method of measuring climate emissions that favours western countries – by measuring emissions at the point of production within a state boundary (so a country’s emissions are calculated from adding up pollution from power stations, vehicle emissions etc). A more accurate measure is to calculate based on what is consumed within a country and follow the emissions back down the supply chain (so looking at the materials that make up a washing machine and how they were produced, what it took to feed the pigs that are turned into bacon, the process of manufacturing clothes and how they are transported to the point of retail sale etc). The latter is more accurate in attributing real responsibility for emissions and climate change. The US’s measured emissions would rise by minimum of 20%, probably more, if such a consumption methodology was used – while China’s would fall substantially. This would of course be a good but radical change.
Serious negotiations therefore lie ahead in which both economic and environmental factors must be considered. But what is clear is that China already has the leading position among the largest states in dealing with climate change and this is increasingly recognised by other countries and international environmental organisations. This issue is not only vital for China itself but also vital for the whole world and for international perception of China.
China’s framework is, of course, its ‘national rejuvenation’. A ‘vanguard’ of clear-headed people in other countries can understand that China’s national rejuvenation is in their interests as well. But the mass of people judge things by whether they benefit from them – that is agreements must be ‘win-win’. This is a central part of Xi Jinping’s concept of a ‘common future for humanity’. China’s policies on its economic growth and climate change precisely create ‘win-win’ solutions for itself and other countries.
Conclusion
The need for ‘people centred growth’ adopted at the NPC, which centrally includes integrating economic growth with environmental concerns, flows from China’s own domestic needs. But it also provides a key basis for China’s international agreements – which in turn are significant for China’s own development. They are also a key part of China’s ‘soft power’. These policies have been adopted for implementation in China to correspond to China’s domestic development but, as shown, they also fit with current trends globally. It is therefore greatly to be hoped that China’s diplomacy and public relations will skilfully project these issues internationally.
This article was previously published on Learning from China and the Chinese language version of this article first appeared at Guancha.cn on 15 March 2019.

Tuesday, 5 March 2019

Corbyn's Labour - part of the new international movement against climate change

By Ken Livingstone

We are quickly running out of time to make the necessary steps required to prevent global warming exceeding the critical point of a 1.5 degree celsius rise. The International Panel on Climate Change has argued we have just over a decade to take the decisive action to reduce the amount of carbon in the atmosphere. We face a direct existential threat if we do not rapidly switch from fossil fuels by 2020, and a failure to do so will mean runaway climate change.

Already we are seeing record-breaking temperatures, extreme heatwaves, storms, floods, and wildfires leaving a trail of death and devastation. As the UN’s Antonio Guterres has said, scientists have warned about global warming for decades, but "far too many leaders have refused to listen [and] far too few have acted with the vision that science demands."

When it comes to having both the vision and policies needed to address these severe dangers, it is only voices from the left that can put forward the radical changes to the economy needed, and it is the globally resurgent extremeright that is instead forming an international axis of climate change denial. Specifically, Donald Trump's administration is continuing to undermine the Paris Climate Agreement and has made clear that the US will withdraw from it when the rules allow him to do so in 2020.

He is joined in this by the far-right president of Brazil Jair Bolsonaro, who has issued an executive order to facilitate the acceleration of deforestation in order to open up the Amazon rainforest for further exploitation by agribusiness, mining and construction companies. This move could destroy the ‘lungs of the planet’ by reducing the planet’s ability to absorb and store carbon.

While Bolsonaro and Trump claim these devastating policies are in the economic interests of their countries and populations, in reality they only advance short-term profits for a tiny elite. In the medium to long term they will have a devastating impact on the living standards of the overwhelming majority, especially the poorest, who are impacted by climate change the most.

This reactionary agenda faces stiff resistance from climate justice campaigners. Importantly we are also starting to see the seeds sown of an international political movement demanding a new, socially and environmentally sustainable model of political economy.

This movement understands that we need a fundamental transformation away from neo-liberalism, and that it is impossible to tackle climate change without simultaneously reducing inequality, and vice versa.

In the belly of the beast itself, the Green New Deal resolution put before the US Congress by Alexandria Ocasia-Cortez coherently melds action to tackle climate change with measures to counteract the obscene inequality and wage stagnation that has built up over decades of neo-liberalism.

The resolution starts with the Intergovernmental Panel on Climate Change’s conclusion that the only science-based target to tackle the climate crisis is to constrain a global average temperature rise below 1.5 degrees. But it also takes as its evidential starting point “hourly wages overall stagnating since the 1970s… the third worst level of socio-economic mobility in the developed world before the Great Recession…[and] the greatest income inequality since the 1920s”, including a specific focus on the racial and gender wealth divide.

To overcome this, it advocates the US government launches at least a trillion dollars in state investment to eliminate fossil fuels and switch to 100% renewable energy in the next decade, which would inevitably boost growth and create quality jobs.

Labour’s proposed green jobs revolution, creating hundreds of thousands of jobs and recently elaborated by Rebecca Long-Bailey, also shows that Jeremy Corbyn-led Labour is a central part of this international movement for change.

As Rebecca said, “We believe that together we can transform the UK through a green jobs revolution, tackling the environmental crisis in a way that brings hope and prosperity back to parts of the UK that have been held back for too long.”

After decades of neo-liberalism, our economy is structurally weak and deeply unequal. Whole communities have been de-industrialised, insecure and low paid work has soared, our infrastructure is underinvested and crumbling, and our society's fabric is being pulled apart by austerity. In direct contrast to this failed approach, Labour’s green jobs revolution can improve the living standards of millions.

Jeremy Corbyn understands that only a total transformation of the failed neo-liberal model can change this, protecting both people and planet. This not only offers hope for a better life here, but is also part of a new international alternative to ensure humanity has a future.

» Follow Ken at www.twitter.com/ Ken4London and www.facebook.com/ KenLivingstoneOfficial

The above article was previously published here by Labour Briefing.

Thursday, 21 February 2019

Despite himself Trump admits the superiority of China’s socialist economy to capitalism

By John Ross
Major events, such as the Trump administration launching tariff aggression against China, inevitably ruthlessly cut away hollow rhetoric and allow the objective facts of a situation to be seen – including revealing how the different forces in a situation really judge it. A particularly striking example of this principle, with deep implications not only for China but for all countries, is that the reasons given by the Trump administration for launching its trade war against China in fact entirely destroy that administration’s own propaganda that socialism is ‘inefficient’ in promoting economic development compared to capitalism. In reality the Trump administration is forced in practice, as will be shown, to acknowledge that China’s socialism is more effective as a path of economic development than capitalism.
It is certainly deeply ironic that President Trump, an avowed supporter of capitalism, is forced in practice to acknowledge the superiority of China’s socialist system – he is certainly not himself aware he is making this admission! But this reality is immediately demonstrated by the Trump administration’s own claim that China has an ‘unfair’ economic advantage due to the consequences of China pursuing a socialist economic path of development. It is therefore equally ironic that neo-liberal commentators in China attempt to claim capitalism is more efficient than socialism at the time when the Trump administration is forced by economic reality to admit the exact opposite.
This fact that the Trump administration, and large parts of the Western media, are themselves unaware that they are stating the superiority of China’s socialist economic system has no bearing on the objective content of what they are admitting. But examining this contradiction between the Trump administration’s propaganda claims, and the reality it is forced to recognise, casts an important light on the superiority of a socialist economic system compared to a capitalist one.
This article, therefore, examines this gap between what the Trump administration is forced to admit in reality and its propaganda. Given such a contradiction, analysing the logic of Trump and Western media statements, and their internal contradictions, also therefore confirms the practical correctness of China’s socialist choice of development.
But, as will be seen, the issues involved in this economic choice between socialist and capitalist paths of economic development, and of the outcome of the Trump administration’s trade aggression against China, are crucial not only for China itself but for all countries – indeed for humanity as a whole. Furthermore, they give a particularly striking and direct confirmation of one the most important principles of Marxism. Therefore, the internal contradictions in Trump’s and similar claims merit examining in detail – after all, when an opponent of socialism is forced in fact to admit the economic superiority of the socialist system this is something worth analysing and thoroughly understanding!
Slowing China
That the aim of the Trump administration’s tariffs against China is to slow China’s economic development is now either scarcely concealed, or is openly admitted, by both that administration and by anti-China sections of the Western media. Numerous examples could be used to illustrate this so simply two especially prominent ones will be taken for examination here – all similar claims have the same logic.
Taking first a leading example from the media, on 18 October, The Economist carried a long cover story ‘The End of Engagement’ that noted: ‘America fears that time is on China’s side. The Chinese economy is growing more than twice as fast as America’s and the state is pouring money into advanced technology, such as artificial intelligence, quantum computing and biotech. Action that is merely daunting today… say… to challenge China in the South China Sea—may be impossible tomorrow.’
Speaking in August, President Trump himself declared: ‘When I came [to office] we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time. That’s not going to happen any more.’
However the reality is that facts show, as analysed earlier in Trump’s Economy – Cyclical Upturn and Long Term Slow Growth that the Trump administration has failed to significantly accelerate the US economy’s growth rate. In fact, the opposite situation exists:
Peak growth under Trump is the lowest under any US president since World War II.
US growth during the whole of the current business cycle is the slowest during any business cycle since World War II.
As the Trump administration has been unable to substantially accelerate US growth, therefore the only method available to it to prevent China being ‘bigger than us in a very short period of time’ is to slow China’s development. This is, of course, the reason for the Trump administration launching trade aggression against China.
What Trump is in reality admitting
To achieve this goal of slowing China’s economy the common core demand that President Trump’s administration makes is that China’s state should not intervene in the economy – seen notably in its call for China to abandon SOE’s, the attack on state economic priorities in ‘Made in China 2025’ etc. All these are claimed to give China an unfair advantage in competition with the US.
It is, indeed, perfectly true that China’s state strategically intervenes more in its economy than the US state does in the US economy. That is, as Xi Jinping put it, China uses both the ‘visible hand’ and the ‘invisible hand’ to develop its economy. In contrast, the modern US economy attempts to rely almost exclusively on the ‘invisible hand’. China’s preparedness to use both visible and invisible hands is indeed, of course, a feature flowing from its socialist economic system.
But the contradiction between the Trump administration’s verbal propaganda claims of the efficiency of capitalism, and its actual practical positions regarding the trade war, becomes evident the moment the actual content of Trump’s claims is thought about. Because Trump’s claim that China has an unfair economic advantage simply completely contradict the US propaganda claim that socialism is less efficient than capitalism! For if state enterprises and state intervention in the economy, as part of a socialist system, were less efficient in promoting growth than private capitalism their use would not be an unfair advantage for China – on the contrary state intervention and state enterprises would be a serious disadvantage for China.
If state intervention in the economy, including state enterprises, were really less efficient than capitalism then in fact the best way for the Trump administration to slow China’s economic development would be to call for China to maintain its state intervention in the economy, or even to increase it – not for China to abandon its unfair advantage of state intervention! If state intervention in the economy were really less efficient than private capitalism the greater the state intervention in the economy the slower China’s economy would grow – SOEs, for example, should be a disadvantage for China’s economy not an unfair advantage.
The fact that Trump/The Economist etc claim that state intervention gives China an unfair advantage is therefore in fact an admission that such socialist policies are an economic advantage, not a disadvantage, for China. Naturally Trump and The Economist cannot state this openly, as this would entirely overturn their argument that socialism is less efficient in creating economic development than capitalism. Indeed, so confused are Trump/The Economist, and lacking in self-awareness and understanding of their own arguments, that they certainly do not understand themselves that they are admitting the superiority of socialism in creating economic development. But that is the inevitable and inescapable conclusion of their argument that China is obtaining an unfair advantage by state intervention in the economy – that is, of China’s willingness to use both the visible and the invisible hands in economic development.
The implications for the US
Furthermore, the implications of this de facto admission that socialism gives an advantage in economic development compared to capitalism for the US are obvious and, if considered rationally, produce the exact opposite conclusion to the one the Trump administration advocates. Their logic is that rather than asking China to abandon the unfair advantage of state enterprises and state intervention in the economy, if state intervention in the economy and state-owned enterprise gives China an unfair advantage, allowing its economy to grow more rapidly than the US, then it is urgent for the US to establish SOEs and undertake state intervention in the economy – thereby allowing the US economy to gain the same advantages as China and grow more rapidly! The reasons why the US will not do this are analysed below but, in turn, this allows the real choice facing not only China and the US but all countries to be clearly understood. For what Trump/The Economist, and similar arguments, are in fact admitting is:
1. As they claim state enterprises and state intervention give China an unfair advantage, they are therefore are in reality admitting that a socialist economic system has an unfair advantage compared to a capitalist one – that is why Trump/The Economist demand that China abandon this unfair advantage of its socialist economic system.
2. But if countries adopt a capitalist system, and therefore do not make use of the unfair advantage of a socialist economy, they will grow more slowly. Therefore, what Trump/The Economist are asking is that countries do not adopt the unfair advantage of a socialist economy but instead that they should have a capitalist economy and therefore accept to develop their economy more slowly – i.e. in fact Trump/The Economist argue that the issue of maintaining a capitalist economic system should take priority over the most rapid possible course of economic development.
Speed of China’s economic development
To understand this issue in practice, it is certainly factually true that the admission by Trump/The Economist of the advantage for speed of development of China’s socialist system, compared to a capitalist one, is accurate – as is easily shown by international comparisons.
To summarise the results of the period of development of China’s economy during the construction of a socialist market economy compared to capitalism, from 1978 to the latest available data there are 155 countries, regions or income groups for which there are GDP and per capita GDP data for the period 1978-2017 by standard World Bank classification. As shown in Table 1, during the period 1978-2017, that is the period of China’s socialist market economy, China’s economic growth ranked number one internationally among all countries, regions or income groups. In terms of international comparison China’s GDP growth was:
  • Almost 13 times greater than the US.
  • Over 12 times greater than the EU.
  • Almost 16 times greater than Japan.
  • Almost 7 times faster than the average for developing economies – the overwhelming majority of which are capitalist.
Taking the criteria of per capita GDP growth, as well as total economic growth, China equally ranked number one. In 1978-2017 China’s total per capita GDP growth was:
  • Almost 13 times that of the US.
  • Over 12 times that of the EU.
  • Almost 12 times that of Japan.
  • Almost 9 times that of all developing countries.
In summary, China’s socialist path of economic development showed overwhelming superiority in generating economic development to that of capitalism – whether capitalism is considered in advanced or developing economies.
The Trump administration/The Economist are therefore quite correct to acknowledge the superiority of the results for economic development of China’s socialist system compared to capitalist alternatives. But then it is entirely illogical for them to argue that China should abandon a socialist system, delivering more rapid economic development, and instead adopt a capitalist one which produces slower economic development. The logical choice is for countries growing more slowly to switch to the system producing the most rapid economic development, not for countries enjoying rapid economic development to switch to a system which produces slower growth!
Consequences for humanity
Finally, in order to understand the significance of these issues, and this choice, not only for China but for the whole of humanity it should be clearly grasped that the question of the rate of economic development is not simply, or even primarily, important in terms of ‘concrete and steel’ – that is physical indicators of output. Economic development has overwhelming implications for the social conditions of every country, for national well-being, and for humanity as a whole. Economic development remains the decisive issue confronting most countries – only 17% of humanity currently lives in ‘high income’ economies by World Bank international classification, that is economic development remains the decisive issue for 83% of humanity, and the consequences for the overall well-being of human beings, and of national wellbeing, of economic development is overwhelming.
Taking simply average life expectancy, which is known by economists to be the most significant indicator of overall living and social conditions:
  • The difference in average life expectancy between a high-income economy and a low-income economy by international standards is 18 years.
  • The difference in average life expectancy between an upper middle-income economy by international classification, such as China, and a high income one is over five years.
Therefore, achieving economic development is the key to improving social living conditions. For countries to abandon, or fail to adopt, the unfair advantages of a socialist economic system is therefore literally a life or death question for their citizens. What Trump is demanding by attempting to slow China’s economy is not simply that China should not achieve economic development, but that China should literally condemn its citizens to die earlier than is necessary. Equally, those who claim that countries should not make use of the unfair advantage of socialist development, or attempt to force countries to abandon them, are in fact condemning the majority of humanity to needless backwardness, suffering, and an unnecessarily early death.
Implications for other countries
These real social implications of economic development therefore show why the consequences of the choice of a socialist path of development is of decisive significance not just for China. It is why in defeating the US trade aggression against China the interests of humanity are on the side of China because:
  • China’s rapid economic development creates a stronger global economic dynamic which in turn aids other countries development – while, equally, US success in slowing China’s economy would therefore make it harder for other countries to pursue their own economic development.
  • China has created the world’s most successful path of economic development. No other country can mechanically copy China’s development, but they can learn from it. Success by the Trump administration in blocking China’s socialist path of development would therefore be a setback for every country.
Indeed, the implications of the outcome of the US trade aggression against China go further even that straightforward economics. The US has repeatedly shown that it is prepared to use military force against weaker countries (Iraq, Libya) to engage in de facto military threats even against powerful countries (expansion of NATO up to the borders of Russia, supply of arms to the separatist leaders of Taiwan Province), and to use the unilateral imposition of economic sanctions (Russia, Iran). Success of the US in trade aggression against China would therefore undoubtedly strengthen such US military and geopolitical threats. Detailed analysis of this, however, would take a further full article so here merely the economic logic of the Trump administration’s positions are considered.
The relation of national development and business development
Returning to this purely economic aspect, if those such as Trump/The Economist cannot see that by their claim that China has an unfair economic advantage that they are in reality acknowledging the superiority of the socialist system why are they blind to the logic of their own argument? Because in reality they place class values, those of the capitalist class, above those of the nation or of humanity. Thereby, despite their own wishes, they are in fact forced to confirm one of the most important arguments of Marxism.
This is shown clearly in a criticism of China such as The Economist‘s claim that:
‘Mr Trump is… right that America needs to reset expectations about Chinese behaviour. Today’s trading system fails to prevent China’s state-backed firms from blurring the line between commercial interests and the national interest.’
This alleged confusion by China between ‘national interests’ and ‘commercial interests’ is part of The Economist’s criticism of China’s SOEs. Therefore a criticism that China’s SOEs allow the ‘national interest’ to influence the ‘commercial interest’, and that when there is a conflict the SOE’s place the national interest above the commercial interest. By this, obviously, there is an acknowledgement that in certain situations there may be a conflict between national interests and purely commercial interests.
But if there is a distinction between the ‘national interest’ and the ‘commercial interest’, and The Economist admits there may sometimes be conflicts, which should take precedence? What most people, including in China, would want is that when such conflicts occur the national interest is placed first. The Economist, however, on the contrary makes it a criticism for the national interest to come before the commercial interest. That is, for The Economist the ‘commercial interest’ must come before the ‘national interest’.
But what is this ‘commercial interest’ The Economist is so concerned with? In the West it is, of course, the interest of private capitalist companies – which dominate the Western economies. Therefore, what The Economist is arguing is that the capitalist interest of companies, that is the interests of the capitalist class, should come before the ‘national interest’.
This concept is precisely why the Trump administration/The Economist argue China must not use the unfair advantage of utilising both the visible hand and the invisible hand, that is both the market and state intervention in the economy. The Economist, in line with the Trump administration, are criticising China from the point of view of a framework that in the event there is any conflict between the ‘national interest’ and the ‘commercial interest’, that is between the national interests and the interests of the capitalist class, then the interests of private capitalism must come before the national interest. It is precisely because it has the opposite framework, that the national interest must take precedence of the interests of private capitalism, that allows China’s economy to develop more rapidly than a capitalist economy. The Economist however, in line with the Trump administration, argues capitalist class interests come first – even if this produces slower economic development.
Ironically therefore, although they certainly do not intend to do it, the Trump administration/The Economist in fact prove Marx’s famous formula classically expressed in his Preface to the Critique of Political Economy: ‘At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or – what is but a legal expression for the same thing – with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters.’
By arguing that the ‘commercial’, that is the capitalist, interests must come before the national interest, the unfair advantage the Trump administration/The Economist claims that China has is precisely its socialist economy – and its advantages compared to a capitalist economy. What the Trump administration/The Economist are in fact arguing is that countries, starting with China, should not use the advantages of a socialist system but should reduce their rate of economic development to a level compatible with the interests of the capitalist class. In summary the Trump administration/The Economist are, without understanding it, expressing in a completely classical form the contradiction between the class interests of capital and the interests of humanity.
Conclusion
To summarise. From the point of view of China this link between its socialist path of its development and its national rejuvenation concerns the well being of the Chinese people and the Chinese nation. Despite the People’s Republic of China’s gigantic achievements, China started its development from a position where in 1949, after a century of foreign intervention, China was virtually the world’s poorest country – less than 10 countries had a lower per capita GDP than China and its life expectancy was 35. With such a low starting point even the internationally and historically unparalleled economic development created by China’s socialist reform and opening up takes a prolonged period to achieve prosperity for the Chinese people – it will still be two years before China achieves ‘moderate prosperity’ by its national standard and around five years before it achieves the status of a ‘high income economy’ by international World Bank standards. Even with the speed of development of its socialist market economy it will be several decades before China’s living standards reach the highest in the world. The abandonment of the socialist path of development, the acceptance of the demands by the Trump administration, or anyone else, that China abandon its more economically successful path of socialist development, and adopt the slower one of capitalism, would therefore be a catastrophe for the Chinese people and the Chinese nation. It would, as in the former USSR when it adopted capitalism, inevitably lead to the growth of separatism and other deadly threats to the Chinese nation. Experience shows that the weakening of China would encourage the most militarist and other dangerous forces within the US.
But while this issue of the path of development will, of course, be determined by the issue of China’s own national development its consequences will affect every other country. That is why the interests of other countries, and of humanity, coincide with those of China in countering the trade aggression of the Trump administration.
In summary the advantages of China’s economic system only appear ‘unfair’ to the US because the US refuses to embark on a socialist path and clings to the slower path of economic development of capitalism. But in that case why should China abandon a more successful path of economic development – as the deeply illogical demands of the Trump would result in?
There is indeed a deep irony. In its empty rhetoric and media propaganda the Trump administration proclaims the superiority of capitalism and the inefficiency of socialism. But in its practical actions the Trump administration is forced to acknowledge the economic advantage of socialism. Which of these two should be taken more seriously?
As the wise English method of judging says – actions speak far louder than words.
* * *
This article was previously published on Learning from China and originally published in Chinese at Guancha.cn on 28/11/2018.