Q&A: Author Will Hutton on China's Future
U.S. News and World Report
January 5, 2007
U.S. News recently exchanged E-mails with Will Hutton about his new book, The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy.
What would be the impact on China domestically if the yuan appreciated 40 percent, as some U.S politicians would like to see happen?
The more than 50 percent rise in the yen in the late 1980s was the single most important cause of Japan's near-15 years of economic stagnation that followed; if the yuan went up by 40 percent suddenly against the dollar, it would have a similarly devastating impact on China. It would bite in two huge ways. Firstly, it would cause peasant incomes to fall sharply because China's internal food prices would fall by up to 40 percent as food imports became cheaper with the appreciation of the yuan; 780 million Chinese still live on the land. And it would stop the 25 percent growth of China's 1 trillion dollars of exports in their tracks–the most important source of economic growth and employment in China's coastal cities. It is already hard enough to find work for more than 10 million migrants who leave the land each year; with a yuan appreciation of that magnitude the numbers would swell into a flood of migrants just as the opportunities for their employment in the eastern coastal cities dramatically worsened. Open and disguised unemployment in China is estimated to exceed 170 million. Unrest is growing even under current conditions. Such a rapid appreciation of the yuan over a short period could be a tipping point for a wave of unrest, which could threaten the regime's stability. The party leadership sees the demand for fast yuan appreciation as an act of economic warfare. In these terms, you can see why.
What would be the international economic impact if growth in China were to stagnate?
China's growth, because the country has been so open to imports, has been the single most important stimulus to the Asian and, thus, world economy over the past five years. China's stagnation would trigger a global slowdown, maybe even recession. On the plus side, oil and commodity prices would fall. On the negative side, there would be all the ills of a slowdown, but on top there would be major financial implications. The World Bank estimates that if China's growth rate fell by just 2 percent, up to 60 percent of China's bank loans would become nonperforming–so threatening both China's and, via Hong Kong, Asia's financial system. The flow of saving to finance the U.S.'s deficit would dry up, probably forcing U.S. interest rates up–so worsening the economic slowdown.
What's the greatest threat to continued fast growth in China, and what are the probabilities of its occurrence?
There are four great economic threats. I've discussed the revaluation of the yuan. Next there is the threat of protection against Chinese exports. Then there is the threat of a sharp rise in inflation, forcing an increase in interest rates and credit controls. Or there is the risk of a credit crunch forced by the banking system being overwhelmed by nonperforming loans. The fifth threat is political–the turmoil that would follow a fight for political power. I think there is more than a 50 percent chance of protection against Chinese exports, a 30 percent chance of a sudden sharp revaluation of the yuan, and a 20 percent chance of dangerous inflation and of a credit crunch. The risk of political instability is low, but it exists.
So-called fair-trade advocates push for China to raise working standas and let the yuan appreciate in order to end "unfair subsidies" to Chinese industry. Does this make good economic sense?
Very few people assess the overall balance of advantage in the U.S.'s relationship with China. It is true that China's cheap exports do cause problems in some American manufacturing companies; but the direct numbers of American jobs that migrate to China, estimates the Bureau of Labor, is tiny–fewer than 10,000 in any one year. On the other hand, American consumers get more for their money, and with Chinese savings financing American spending, American interest rates are lower–so consumption levels are higher. In short, the whole economic pie is much larger so that gainers vastly outnumber losers–but the gainers are diffuse, while the few losers are obvious–and very effective lobbyers. As for China's labor standards, it should be allowed to take advantage of cheap labor costs–but there should be obvious limits to rank exploitation of, say, children or of adults in sweatshops. But even if all that were stopped, Chinese labor is still cheaper than American–and both sides benefit from trade.
What can the U.S. do to help facilitate the continued economic connectivity and progress of China?
The U.S.'s best strategy is to stay open. China's current economic model is reaching the end of its capacity to deliver without substantial change. I argue in my book that democracy is good for the economy; accountability and whistle-blowing keep managements up to the mark and help efficient resource allocation. China's astonishingly low productivity, wastefulness, and environmental degradation are self-destructive; it needs institutional change and the panoply of democratic institutions. By staying open, the U.S. brings forward the day that China has to change–and especially by exposing it to best western practice. But that means we have to practice what we preach....
When will the Chinese middle class push for greater political freedom to match growing economic freedom?
The $64,000 question. The extent of the ideological bankruptcy of the Chinese Communist Party is not widely understood in the U.S. It claims single party rule because it is the trustee of the 1949 Communist revolution governing democratically for China's workers and peasants. Its problem is that communism is in reverse worldwide, and under the doctrine of the "Three Represents" invented by Jiang Zemin, the party now accepts that class war is over and that it must represent all Chinese society. In which case: Why no accountability? Change came in the Soviet Union with the fifth generation of leaders; the fifth generation of leaders succeeds Hu Jintao in 2012. I don't expect any change until after then, but my guess is that sometime in the mid-to-late 2010s, the growing Chinese middle class will want to hold the Chinese official and political class to account for how they spend their taxes and for their political choices