Will the Chinese economy transition to a sustainable model and surpass the American economy in nominal terms?

Authors in general disagree on this topic.

The thesis that command economies, of socializing nature, would represent advantages to the private initiative model had several proponents throughout history, many of them from western academia (one should not forget that Marx himself was German). E. H. Carr, a proponent of internationalist realism in the first great debate in International Relations, was an avid apologist of the USSR, and considered the emergence of its power inevitable, which would also bring to the fore its economic model. He believed that the United Kingdom should seek out an Anglo-Soviet alliance in the post-World War II era¹. From a normative standpoint, Carr is seen as having a certain relativistic character, reminding us of the sophist Thrasymachus in Plato’s Republic, who stated that just is whatever the strongest decrees. Carr was frequently criticized by what is seen as his apologia of Nazi Germany, since in his understanding, its acts of aggression were the result of a dynamic in which conflict is generated by states that seek out economic resources, attacking those who have them, and Germany of the first third of the 20th Century was precisely in an economically disadvantageous position as a result of a set of historical facts².

But like E. H. Carr, there were others who defended the soviet system. Harry Dexter White, US representative whose conflict with John Maynard Keynes made itself noticed during the Bretton Woods agreement negotiations, consented that the Soviet Union executed what was, in practice, robbing the USA, utilizing the monetary system which was installed in occupied Germany so that the USSR would withdraw a large amount of US dollars in exchange for nothing. Harry Dexter White would pass away during the trial over his activities that benefited the USSR.

Paul Samuelson, who would receive the Nobel Prize in Economics and is still today known for his comprehensive academic textbooks, was also an apologist of the command economy. The 1967 edition of one of his textbooks predicted that the economy of the USSR would reach parity with the american economy somewhere between 1977 and 1995. In 1985, this prediction was removed from his textbooks altogether. The reality was that at each revision, the expected date to reach parity was delayed, and the USSR ended up collapsing before it came to happen.

The predictions of American decline multiplied throughout the 20th Century, and during the 80’s the big threat was seen as Japan. The latter is particularly interesting, because the Japanese economic model has some similarities with the current Chinese model. Its growth was mostly supported by exports, and it’s in this phase that Japan becomes known for its high technology, and also for the popularity of its automobiles.

But this leads us to another question. Is the Chinese economy centrally planned, private-initiative-led, or “it’s complicated”?

Xi Jinping was recently quoted as saying that the Marxist economic model is the bedrock of the Chinese economy. To analyse this fact, we must first look at the situation in terms of private proporty in the country.

The Chinese system allows for private initiative, and an individual may, by his own volition, begin entrepreneurial activity, just as one would in a western country (however, this is a right that is reserved to nationals, as foreigners have restrictions placed on them such as the obligation of entering into a joint venture with a Chinese partner and to hire Chinese employees). Property is freely commercialized, from real estate to financial assets, with there being a lively stock market. So, can we say that the Chinese economy is capitalist?

The answer is not simple, once again.

While it’s certain that there’s a strong private component in the Chinese economy, the state controls strategic sectors, such as energy. The government also runs strong supply-side stimuli – such as money supply increases, which doesn’t fit with a laissez-faire capitalist view, which is anti-government expenditure and intervention. These stimuli result in low levels of unemployment. However, internal demand is relatively low, and we can see the the tax regime is regressive – individuals with lower income pay a larger share of income as tax, reducing their respective purchasing power. The Welfare State in China is also markedly weak, which places its economic system in contrast with the mixed systems of Europe and other parts of the globe, where social benefits are relatively high.

In effect, currency devaluation practices that China, as well as other trade-surplus countries make use of, consist in mechanisms that result in wealth transfers from salaried workers to property owners. The mercantilist leanings of these economies is very clear, among which we can count Germany from 2000 onward, whose indirect devaluation of the currency resulting from the Eurozone and low wage policies have led to increasingly larger profit margins, despite its social costs that may explain the rise of extremist political discourse in the country.

When we look at the structure of Chinese GDP, we see that by dividing it into 3 components, namely consumption, investment and exports, the share that consumption represents, which refers to household expenditures, is very low. It becomes necessary to explore the conditions which would be needed so that China may achieve its goal of building a sustainable and competitive economy in terms of internal demand, keeping in mind that the predominance of investment as a share of GDP is dependent on the ability of the state to keep accruing debt to finance large infrastructure projects and financial supply-side support, as we have already seen, and that, as a consequence of this, the sustainability of the system is currently depending on the growth of its exports, such that it may justify this investment into generating productive surplus.

This exploration will be addressed in part II.

[1] Quote: “I remember clearly that I refused to be indignant about Hitler’s re-occupation of the Rhineland in 1936 (…). This was a rectification of an old injustice, and the Western Powers had asked for what they got.” (p. xx)

[2] Quote: “In The Times I very quickly began to plug the Russian alliance; and, when this was vindicated by Russian endurance and the Russian victory, it revived my initial faith in the Russian revolution as a great achievement and a historical turning-point. (…) Looking back on the 1930s, I came to feel that my preoccupation with the purges and brutalities of Stalinism had distorted my perspective.” (p. xix)