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How the tables are turned. As Britain tips back towards recession and the eurozone hovers on the brink of implosion, George Osborne hurried off to the former British colony of Hong Kong this week to drum up business for the City as a future trading centre for the Chinese currency. On Tuesday he was in Beijing to lobby China to do what neither the British private nor public sector is prepared to do – invest in crisis-ridden Britain.
The chancellor's quest follows the European Union's fruitless attempt to convince China to use some of its colossal reserves to back the eurozone's bailout fund. And given the relative performances of the European, US and Chinese economies in recent years, it's not hard to see why western politicians now feel the need for Chinese support.
It's a commonplace that China is the world's emerging economic giant. After 30 years averaging more than 9% annual growth, China is now the world's second largest economy and its fastest-growing market. Hundreds of millions of Chinese have been taken out of poverty, as its international share of manufacturing has risen from 2% to 20% in 20 years.
But it has been the slump in Europe, the US and Japan that has most dramatically underlined the yawning gap in performance between the world's long-established economic powers and China. In the four years from 2007 to 2011, US national income increased by less than 0.6% (the figure is still being revised down), the EU shrank by 0.3% and Japan declined by 5.2%. In the same period, despite the decline in export markets in those economies, China grew by more than 42%.
But there is a deep reluctance in the austerity-afflicted western world to consider the reasons for such an astonishing gap. Europe is already heading ever deeper into the second phase of the crisis that erupted in 2007-8, now centred on the eurozone. When the credit agency S&P downgraded nine states' creditworthiness and the eurozone's own bailout fund, warning that "fiscal austerity alone risks becoming self-defeating", Angela Merkel's response was to press for the adoption of even tighter austerity.
It is a recipe for economic disaster. Meanwhile, western analysts are predicting that China is heading in the same direction – as they have consistently and wrongly done for the past decade, but especially since the crash of 2008. The latest predictions of a "hard landing" for China focus on inflationary pressure, a legacy of bad bank loans, an overheated housing market, and the impact of stagnation or worse in Europe and the US.
Maybe the pessimists will be proved right at last, but there are powerful reasons to suggest otherwise. Chinese growth for 2011 was 9.2%, compared with forecasts for Britain of around 1%. It's expected to drop back this year to between 7% and 8% – the kind of crisis to dream for. Last year's inflation is cooling off, as is the property bubble which, unlike in the US and Britain, was funded by savings rather than borrowing.
As the Shanghai-based British economist John Ross argues, China has a strong record of absorbing bad loans in the wake of the 1997 Asian debt crisis, and is cushioned from the collapse in western demand by the fact that most of its trade is with the developing world.
But crucially – unlike Britain, the US and the stricken eurozone economies – China has a modest budget deficit of around 2%. Which points to the central reason why China was able to ride out the global crisis of 2007-8 with such dramatic success. China's response was to launch the biggest stimulus programme in the world, investing heavily in infrastructure.
But instead of doing it through deficit spending and printing money, the Chinese government was able to use its ownership and control of the banks and large state companies to increase lending and investment. Which is why China has grown by 10% a year since the crash, while the west and Japan have shrunk or stagnated.
China has travelled a vast distance from the socialised economy of the Maoist period and has a huge private sector and large-scale foreign investment. But its hybrid economic model continues to be based around a publicly owned core of banks and corporations. So while in Europe and the US governments rely on indirect (and so far entirely ineffective) mechanisms to reverse the collapse of private investment at the heart of the crisis – and private banks and corporations hoard bailout cash – China has the leverage directly to boost investment, jobs and incomes.
And that state-owned core has been central to the country's extraordinary growth over the past three decades. Of course that advance has also been based around the largest migration of workers in human history. And the costs of its economic rise have been massive: from rampant corruption and exploitation of low-wage labour to environmental degradation, decline in health and education provision, an explosion of inequality and serious restrictions on civil rights.
Strikes and rural upheavals across China – as well as political shifts – are now challenging and having their impact on those failures. But China's authoritarian system can also lead people elsewhere to ignore some powerful lessons about its economic experience. And one of those is that what used to be celebrated across the political mainstream in Britain and Europe as a "mixed economy" – along with long-discarded levers such as capital controls – can deliver results that a privatised, deregulated economy is utterly unable to do.
There's no sense in which the evolving Chinese economic model could or should be transplanted to Britain or Europe. And having long ago sold off public stakes across the economy, most European states don't have anything like the financial or industrial leverage that China does to drive economic growth.
But it would also be obtuse not to recognise that a private-sector and market failure is at the heart of the current crisis; or to reconsider the role that new forms of public ownership could play in a modern economy in the light of China's experience; or to refuse to use publicly owned institutions that do exist, such as Britain's part state-owned banks, to forge a way out of the crisis. China's success represents a global opportunity, as George Osborne has grasped. But it should also be a challenge to a failed and discredited economic consensus.
Twitter: @SeumasMilne
Comments
17 January 2012 10:11PM
If you say so. Have you noticed that China seems to be investing a lot in its housing market recently? Particularly skyscrapers. It is a well-noted phenomenon that whenever a country starts a skyscraper building boom, it is on the edge of a crash.
China's growth isn't sustainable; it will soon come to end. And I bet you that it's with a bang, not a whimper.
17 January 2012 10:13PM
Aren't you slightly overlooking the fact that the Chinese government owned banks have money to invest, whereas the British government owns stakes in banks that are or were effectively bankrupt?
17 January 2012 10:13PM
At what stage in the last 40 years were the democratic peoples of Europe and the West invited to consider whether they wanted to become cogs in a global economic system?
I don't ever remember any debates in any elections where any party or politician represented the choice between a pretend-free-market global economic system or the pre-existing more self-sufficient local economic systems.
Consensus was never sought, except from a minority of people specifically economists and business corporatists. Therefore where is there an argument that China won superiority by avoiding free-market economic consensus? More likely, because China had no other choice, it made better decisions about what constitutes a worthwhile economic system. Nonetheless, it is and has become just as dependent and addicted to global resources as everyone else.
17 January 2012 10:24PM
do i sense a slight breathe of appreciation of capitalism (in the chinese form) from a maxist-leninist apparatchik? or am i misreading....
17 January 2012 10:25PM
Well, China is, and will be for a long time, in the same situation that the USA was a hundred years ago: basically big enough to produce and consume within its own market. The Chinese economy could, if they wanted to become independent very well expand by its own growing market with the additional landgrabbing in Africa that they are part-taking in together with the rest of us.
The USA grew into a superpower much thank to an exponentially growing domestic market with additional exploitation of some, but fewer than you'd think, other and poorer countries.
17 January 2012 10:26PM
That said, I would like to see the banks, now when we've paid for them so many times, into state hands.
17 January 2012 10:26PM
Oh dear, and where did they start? And do you, Seaumas, really advocate Chinese workers conditions, Chinese union laws and the way Chinese workers are exploited?
Presumably yes, at least they have banks and utilities nationalized and call themselves Communist. Google delusion, will you?
17 January 2012 10:27PM
All the goods came west, all the money went east, till one day, there was no money left in the west.Economics is so hard.
Who has benefited from this global market ? Not the ordinary folk, who's jobs have gone when their employers, either shut down ,or moved east.All this to make an elite few rich.
Nuff Z
17 January 2012 10:29PM
this article covers nicely everything I was talking about recently, that "hard landing" is just a media creation of Western hedge funds in order to earn money shorting underperforming BRICS stocks.
These sharks earned quite a lot in 2011 from bleeding stock markets and triggering exodus of speculative money. But this year it's hardly wise to short commodities & emerging stocks.
as for state-run corporations - actually Chinese just emulate the West where corporations & banks are just privatized tools of state, too big to fail. Also China is very decentralized country, where state usually means provinces not central government in Beijing. Nevertherless quality of administration is quite high despite corruption scandals, officials deliver on promises by Communist bosses, most of them CCP party members anyway.
So it would be difficult for the West to take direct lessons from China, but I am surprised that Western governments didn't adopt laws for example curbing excessive bonuses, speculating activities and so on. They should also think through about revival of moribund manufacturing and the ways to do it given fact it's impossible to create big state-run corporations or nationalize existing ones.
17 January 2012 10:31PM
And the Dow is going to 40,000. Wait, that was back in 98. Chanos has been right more often than he's been wrong - but as he said, the timing is just luck. Me, I don't have to be so cagey. I'll predict that China will crash in 2012. The real estate credit bubble is beyond any hope of an orderly reverse.
Never mind Europe. China is the big shoe to drop in this ongoing worldwide credit catharsis.
17 January 2012 10:32PM
But as you know, Seamus, when it comes to finding jobs for the offspring of senior State functionaries, there's nothing that China can teach the UK.
17 January 2012 10:41PM
Reading Tania Branigan's article earlier -
http://www.guardian.co.uk/world/2012/jan/17/china-economic-growth-slows-further?newsfeed=true
hoping that China will be the saviour of the Western World seems a tad premature.
Osborne wants China to invest in over 500 infrastructure projects, and promote London as a trading hub for the yuan. I'm unsure if China represents the global opportunity you think Seumas, or just postponing the inevitable.
17 January 2012 10:45PM
And in China they'd have started building HS2 this week. No consultation, just an announcement and off you go.
Is that what you're proposing for the UK?
17 January 2012 10:46PM
Hundreds of millions of Chinese have been taken out of poverty,
The reason why China has boomed these past couple of decades is because it had a large reservoir of poor but disciplined workers who provided cheap labor to sustain an economic boom.
The US, Britain and the rest of Europe don't have hundreds of millions of people willing to work for rock bottom wages.
In any case, Chinese factories are already being pressured as wages are creeping up. China is slowly losing its competitive advantages.
China is a formidable economic force but a few years from now people might stop talking about China's economic success.
17 January 2012 10:49PM
Public ownership is irrelevant. And many, many Chinese companies are not now publicly owned, but are the property of a new wave of billionaires who may Texas oil barons look like cheapskates.
China - like most of the world - has done alright over the last few years because:
- it didn't give mortgages on daft terms with 5 year balloon payments to millions of people with no means to make the repayments;
- it enjoys double digit economic growth;
- it has trade surpluses on a scale that would melt your pocket calculator - the place is awash with cash. It doesn't pay interest, it collects interest (notably from America);
- at least until very recently, workers did not have the nerve (or stupidity) to attemp to strike for better pay and conditions, they just did what they were told. Now, most strikes - which are relatively rare - are rapidly settled.
Whether or not its system of government can any longer be called remotely socialist is a moot point these days, but if you really believe some sort of "pure" socialism is the best way to look after people, how come China's near neighbour North Korea is not doing equally well?
17 January 2012 10:52PM
There was a fantastic piece on NPR on how hoards of wealthy chinese are flocking to the US to get greencards. One of the people coming over shared a joke that he says is common in China:
Says the man staying in China: I heard you are moving to America, are you satisfied with your job?
Says the man moving to the US: Yes I am very satisfied with my job
Says the man staying in China: Are you not satisfied with all the money you are making now?
Says the man moving to the US: Yes I am most satisfied with all the money I am making
Says the man staying in China: Then why is it that you want to leave China
Says the man moving to the US: I want to live in a place where I can say I'm not satisfied
17 January 2012 10:57PM
I have read some specious shit on these threads and this brief block of bull is up there with the worst of them.
17 January 2012 11:02PM
well, we had, and that, and our superior technology, engeneering capabilities, our discipline and our work ethic, our pigheadedness and resulting military power got us to a state of world domination.
China is doing not much more than copying Britain's 19th century ways of industrialization, armament and ruthlessly following her own interests. Look and learn, er, no, remember
17 January 2012 11:07PM
Love it, Seumas. You look at a country that owns it's banks and try to extrapolate for a country where the banks own it.
We will do as we are ordered by our banking masters and their guard dogs the ratings agencies. How can you even think we have a say in any of it? Since when were we a democracy? Did you miss the coup then?
17 January 2012 11:14PM
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17 January 2012 11:15PM
It's not exactly unfounded. It's clear that China is undergoing a building boom. And all bubbles burst eventually. There's more info here: http://www.guardian.co.uk/business/2012/jan/11/skyscrapers-china-india-recession
Call it specious if you want, it doesn't matter. I think China is going to come in for a hard landing sometime soon. I'm not saying this to undermine China, and I'd prefer it if it kept on growing, if only for the good of the world economy. But the signs are pointed to a crash.
17 January 2012 11:19PM
Nope. The US became a superpower by staying out of European wars and trading with all combatants until geopolitics caught up with their model of free enterprise and dragged them in. By that time the Japanese and European infrastructures as well as their manufacturing bases were in ruins handing a competition free world to US industry. Former British colonies like Australia and Canada had stagnant economies. The US thought this status quo would last forever and credit became the fast track to a better living. Actually it lasted about fifty years. A little longer than it’s taken China to emerge from political and economical isolation.
By the late sixties Japan was picking off selected European and US flagship manufactured goods such as motorcycles, automobiles and electronic goods like ducks in a shooting gallery. Same in Europe. Europe came back strong in aviation, heavy machinery and shipbuilding. The US carried on living way beyond its means. Right up until 2007 when the US economy was exposed for what it was. A paper tiger.
Now both trading blocs plus Japan have China to deal with and failing miserably while amazingly still refusing to drag their heads out of the sand. And China is doing it faster even than Korea did it with unlimited US investment.
“We used to beat the world with American know how, now China is kicking our ass.” Donald Trump. Circa 2010.
17 January 2012 11:20PM
It's a commonplace that China is the world's emerging economic giant. After 30 years averaging more than 9% annual growth, China is now the world's second largest economy and its fastest-growing market. Hundreds of millions of Chinese have been taken out of poverty, as its international share of manufacturing has risen from 2% to 20% in 20 years.
...and the reason for China's expanding manufacturing sector is public ownership of banks is it? How about the cheaper than dirt labour force available to industry?!
Are you saying that we want similar employment conditions in the UK? We don't of course, although we do need to accept that the salaries, statutory holidays and excessive employment laws all impact upon our competitiveness and thus our ability to create national wealth. We undoubtedly have tipped the balance too far towards leisure & convenience, but I'm sure there won't be many wanting to trade places with the average Chinese worker.
Seamus is a typical Left winger - wants all the good bits (tip top employment conditions with all the bells & whistles) but thinks we can wish away the bad bits (loss of competitiveness).
17 January 2012 11:20PM
Pity that didn't work for Russia. Or East Germany. Or communist Poland. Etc ad nauseam.
17 January 2012 11:21PM
I've been hearing that since I setteled in China in 2000. There are peaks and troughs but central government seem to have it well under control. The western economies couls take a fewlessons from China.
17 January 2012 11:22PM
Great idea!!! Let's adopt the Chinese system wholesale. Mouthy journalists would be the first to go.....
17 January 2012 11:23PM
Indeed it is. However, that doesn’t mean it’s not working for China which it demonstrably is.
17 January 2012 11:23PM
Ah, mixed economy .............. those were the days ...................
17 January 2012 11:23PM
Does any of this abstract economic 'health' really matter when the workers and the environment are just as exploited as they would be under Western capitalism?
17 January 2012 11:28PM
It's worked for China because there have been thousands and thousands of highly-paid CEOs from Europe and America who moved their production to China (mainly) and other countries, after laissez-faire free trade was adopted in the west.
Aided of course by China not playing the western game, and maintaining a low exchange rate to lure in more and more world companies, allowing their CEOs to become fabulously wealthy.
Hence we have the super-rich .... and the rest, in the UK.
17 January 2012 11:30PM
Catching up is easy - it just requires you to stop doing stupid things, moving ahead is very difficult - we'll know in 30 years whether China has achieved this or not.
Still, suprising to see an old marxist waxing lyrical about wild east Chinovnik-Capitalism.
17 January 2012 11:32PM
During the industrial revolution labour, and life, was cheaper than dirt in UK and Western Europe and it became a manufacturing and military superpower.
Today they have a standard of living and quality of life equal to any.
Dickens wasn’t required reading in your academia then?
17 January 2012 11:32PM
Confusing correlation with causation?
17 January 2012 11:34PM
What do you suggest? Massive trade barriers?
Free trade is nothing new.
17 January 2012 11:35PM
Worked for the US for a while. Remember the Brain Drain in the sixties and seventies. Graduate with a reasonable degree on Friday and you were in the US by monday. Fare paid.
There's nothing new under the sun.
17 January 2012 11:36PM
This form of "free" trade most certainly is.
17 January 2012 11:37PM
Glib response. And pointless.
17 January 2012 11:38PM
mention of China is becoming the new Godwin's Law.
17 January 2012 11:38PM
Glib perhaps. Certainly not pointless. I haven't noticed any great intellectual riposte - just a rather ... glib one?
17 January 2012 11:39PM
Then, sir, your knowledge of history is even more limited than I had believed it to be.
17 January 2012 11:39PM
That was part of it. The other part of the "brain drain" was that there were many, many inventions and discoveries by UK folk in the fifties and sixties. Many were touted round business after business, and few of the businessmen would even look at what was being proffered. The Yanks were far better at recognising a "goer" when they saw one, and snapped them up, to Britain's detriment.
So, not a lot changes, then.
17 January 2012 11:40PM
And so is your's.
17 January 2012 11:41PM
Come again?
Both China and the U.S are facing election politics this year. Do you think both leaderships will let the markets tank, really ?
17 January 2012 11:43PM
But they did have during the Industrial Revolution. You can make a kind of comparison with Western Europe then and China over the last four decades.
17 January 2012 11:44PM
Go on, I'll fall for it.
What form of new 'free trade' has been adopted by the West? Pray do enlighten us.
17 January 2012 11:44PM
I think he's been reading the Mayan almanac.
17 January 2012 11:48PM
Yeah, lets model china.
17 January 2012 11:52PM
Yep.
Alan Tourings first programmable computer ended up as a till in a Lyons Corner House in Oxford St.
Frank Whittles jet engine was laughed at in Whitehall.
Americans still think Edison invented the incandescent light bulb. (Facinating story there)
The Penicillin blunder.
17 January 2012 11:52PM
CCP control of Chinese banks and corporations gave them the ability to hide the losses from their mistakes, and blame the west. Until now:
http://www.foreignaffairs.com/articles/136963/patrick-chovanec/chinas-real-estate-bubble-may-have-just-popped
I think you bought that dead parrot Seamus . . . the one sitting on a pedestal in a forlorn corner of the National Maritime Museum's grounds :
http://www.thegreenwichphantom.co.uk/2010/10/blood-sacrifice/
Go take a look, you will see a five letter word on its belly . . . and it doesn't say Made in before it.
http://www.basicrps.com/chine/histoire/china.htm
. . . did you see by how much the Shanghai Composite Index fell last year :
http://uk.finance.yahoo.com/q/bc?s=000001.SS
17 January 2012 11:56PM
Also, from Wen Jiabao's recent speech,
That says all about Chinese attitude regarding what's real (and fake) economy.