Amid all the coverage of the U.S.-China economic relationship and the global financial crisis, a fair amount of copy is taken up by conspiracy theories and misconceptions.
U.S. media reports sketch opposing images of China as "white knight," rushing to the world's rescue with its $2 trillion in reserves — which, actually, are already invested and not available for use in bailing anybody out — or a "black hand," using its huge holdings of U.S. government debt to choke us into submission. In China, tabloid reports have convinced many nationalistic readers that the financial crisis can only be a U.S.-orchestrated plot to derail China's economy and international ascent.
This economic myth-mongering unfortunately obscures important shifts occurring in the global economy in which the U.S. and China are playing leading roles.
One of the more compelling arguments on this issue comes from Beijing University finance professor Michael Pettis, who warns that we may be on the verge of a powerful backlash against globalization and free trade. He says that it's just another stage of a global monetary cycle that has repeated itself a half-dozen times in the past couple of centuries.
In each of these cycles, international trade and investment flows grow, rich countries' stock and real estate markets boom, and new technologies find widespread commercial applications. With financial markets awash in money, interest rates come down, and investors and lenders make increasingly risky loans and investments in search of higher yields. Chief among such investments are new technologies and emerging markets. The technical term for this flood of money is a liquidity expansion.
The other, darker side of this cycle is liquidity contraction, which is what can be seen now. Historically, the aftermath of such busts often includes social unrest, political populism and radicalism, trade protectionism and a general process of turning inward.
No wonder, then, that China's leaders are very worried about the possibility of an economic meltdown threatening their grip on political power. This is why they have temporarily shelved their long-term concern about moving China's industries up the value chain — and have instead begun propping up exporters by devaluing the yuan, deciding to increase tax export rebates, and in some places halting increases in the minimum wage. All of these measures promise to make the transition to more value-added industries a slower and more painful one.
So far, most of the bankruptcies and layoffs have been among the Pearl River Delta's Hong Kong and Taiwanese-invested factories, which export low-value-added products such as toys, shoes and textiles. These firms have slim profit margins and little in the way of proprietary technology or marketing know-how. Most of them sign contracts with foreign buyers to produce goods at fixed prices. When their labor and material costs go up, as they have with a vengeance over the past year, these firms have no way to pass on costs to consumers. Either the factories find ways to raise efficiency, cut production, or they fold.
In recent years, some of the labor-intensive factories have taken the Guangdong provincial government's advice and tried to move to inland provinces. While labor is cheaper and more plentiful than in Guangdong, exporters there say they face challenges in getting their finished products to the coast for shipping abroad. China's infrastructure is rapidly expanding inland, but it's still very much a work in progress.
China's goal of reducing its reliance on exports and its massive trade surplus with the U.S. is, of course, not just in the interest of the U.S. China's industrial labor force has gotten a very small share of the spoils of two decades of rapid economic growth, for which they take much of the credit. Their wages and standards of living have increased a lot slower than they ought to have.
China also needs to replace energy-wasting, heavily polluting factories with hi-tech and service businesses. And while U.S. households have to save more and spend less, Chinese families need to do the opposite. So every iPhone, patio furniture set and Barbie doll that China exports to America means one less of that product available for Chinese consumers to buy.