11/01/2019 No. 147
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Saving the US or Pursuing Balanced Growth? China's Dilemma in the Global Crisis
By Ho-fung Hung
May 1, 2010

Editor’s Note: We thank Professor Ho-fung Hung for permitting us to publish this article. An extended version entitled “America’s Head Servant?”(New Left Review 60, November-December 2009) has been published on http://www.newleftreview.org/?view=2809.

The subprime mortgage crisis and ensuing global downturn led many to speculate whether any challenger might emerge to replace the US as the dominant player in the capitalist world economy. Immediately after last year’s collapse of Lehman Brothers lifted the curtain on the global recession, there were proclamations of the final triumph of the East Asian, and above all Chinese, model of development; American establishment commentators concluded that the Great Crash of 2008 would be the catalyst for a shift of the centre of global capitalism from the US to China.

But by the spring of 2009, many had realized that the East Asian economies were not as formidable as appearances had suggested. While the sharp contraction in demand for imports in the global North had led to crash landings for Asia’s exporters, the prospect of either the US Treasuries market or the dollar bottoming out presented them with the difficult dilemma of either ditching American assets, and hence triggering a dollar collapse, or buying more, preventing an immediate crash but increasing their exposure to one in future. State-directed investment, rolled out late last year under the PRC’s mega-stimulus programme, fostered a significant recovery for China as well as its Asian trading partners, but the growth generated is unlikely to be self-sustaining. Chinese economists and policy advisers have been worrying that the PRC will falter again once the stimulus effect fades, as it is unlikely that American consumers will be picking up the slack any time soon. Despite all the talk of China’s capacity to destroy the dollar’s reserve-currency status and construct a new global financial order, the PRC and its neighbours have few choices in the short term other than to sustain American economic dominance by extending more credit.

China’s deepening dependence on consumer market in rich countries and on US financial vehicles as the store of value for its savings results from the East Asian developmental model, which originated in Japan and the Four Dragons and was replicated in China in much larger scale. To end this dependence and to create a more autonomous economic order in Asia, China would have to transform an export-oriented growth model—which has mostly benefited, and been perpetuated by, vested interests in the coastal export sectors—into one driven by domestic consumption, through a large-scale redistribution of income to the rural-agricultural sector.

The East Asian model

The story of the rapid postwar rise of Japan and the four Dragons—South Korea, Taiwan, Hong Kong and Singapore—is well known, and need not be repeated here. During the Cold War, US provided these East Asian economies with abundant financial and military aid to jump-start and direct industrial growth, while also keeping American and European markets wide open to Asian manufactured goods. This was an important foundation for the success of East Asia’s state-led and export-oriented industrial growth.

East Asia’s export-oriented industrialization had been coupled with low domestic consumption. Subsequent trade surpluses and high savings rates enabled these states to accumulate substantial financial power in the form of large foreign-exchange reserves. Regarding US Treasuries as the safest investment in global finance, most East Asian exporters voluntarily parked their hoarded cash in low-yield US Treasury bonds, turning themselves into America’s principal creditors. Their financing of the US current-account deficit then fuelled America’s appetite for Asian imports, and the further increase in Asian trade surpluses led to yet more purchases of Treasury bonds. These mutually reinforcing processes continuously amplified East Asia’s market and financial dependence on the US.

If we compare the most important aspects of China’s current political economy with those of its neighbours at a similar stage of development, we find that the Chinese model is largely a replication in extreme form of earlier East Asian growth. The Chinese economy’s trade dependence, as measured by the total value of exports as a percentage of GDP, has been mounting continuously, rising from 21% in 1991 to 40% in 2006, while the average of Japan, Taiwan, and Korea never exceeded 20%. On the other hand, the weight of Chinese private consumption as a percentage of GDP has been declining, dropping from 50% in 1991 to 38% in 2006, while the figures for Japan and Four Dragons always have stayed above 50% since its takeoff.

China’s foreign-exchange reserves and holdings of US Treasury Bonds now well exceed those of its East Asian neighbours. While China’s low-cost exports helped lower US inflation, its massive purchase of Treasury bonds helped reduce their yields and thus also US interest rates. In so doing, China emerged in recent years as the principal upholder of US economic vitality.

Agrarian crisis

China’s ability to institute an extreme version of the East Asian export-led growth model over the last three decades hinged on PRC’s internal political economy. China’s exceptional competitiveness is largely founded on the prolonged stagnation of manufacturing wages in comparison with other Asian countries at equivalent stages of development.

Many argue that China’s wage competitiveness originates in its fixed exchange-rate regime, which undervalues its currency considerably. Others assert that China’s huge surplus of rural labour allowed it to develop with an ‘unlimited’ supply of labour for much longer than other Asian economies. But closer scrutiny reveals both of these explanations to be inadequate. First, the difference between China’s wage levels and those of its neighbours is much greater than could be explained by an undervalued currency. Figures show that Japanese average manufacturing wage had already reached 57 per cent of US wage by 1980, that South Korean rates were at 42 per cent by 1995, and Taiwan's wages reached 35 per cent by 1995. But in China's case, wages have fluctuated since 1980 at between 2 per cent and 4 per cent of those in US manufacturing. Even if the yuan appreciated by 20–30 per cent relative to the dollar—as many American critics of China’s currency manipulation advocate—Chinese wages would still be significantly lower than other Asian exporters.

Second, an unlimited supply of labour is not a natural phenomenon given by China’s population structure, as is so often assumed. Rather, it is a consequence of the government’s rural-agricultural policies which, intentionally or unintentionally, bankrupt the countryside and generate a continuous rural exodus.

The relation between these policies and low wage levels can be illustrated by contrasting China’s rural development with that of Japan, South Korea and Taiwan, which also had large rural populations and agrarian sectors at the beginning of their economic takeoff. In postwar Japan, the ruling Liberal Democratic Party had actively directed resources to the countryside through rural infrastructure spending, agricultural development financing, farm subsidies and tariffs on foreign produce. In South Korea, the Park regime launched the New Village Movement (Saemaul Undong) in the early 1970s, diverting significant fiscal resources to upgrade rural infrastructure, finance agricultural mechanization, and set up rural educational institutions and co-operatives. This initiative was a remarkable success: it increased rural household income from 67 per cent of urban income in 1970 to 95 per cent in 1974, virtually obliterating the rural–urban income gap. In Taiwan, the GMD government pursued similar policies in the 1960s and 70s, alongside conscious efforts to promote rural industrialization. The resulting decentralized structure of Taiwanese industry allowed farmers to work seasonally in nearby factories without abandoning farming altogether or migrating to big cities. This helped retain a considerable share of labour resources in the village, fostering a more balanced rural–urban growth; throughout the 1960s and 70s, per capita rural income was always above 60 per cent of the urban level. Under such policies, it is not surprising that the surplus of rural labour rapidly dried up and manufacturing wages soared in these countries.

In contrast, over the last twenty years, the Chinese government has largely concentrated investment in the urban-industrial sector, particularly in coastal areas, with rural and agricultural investment lagging behind. State-owned banks have also focused their efforts on financing urban-industrial development, while rural and agricultural financing were neglected. In the last two decades, rural per capita income has never exceeded 40 per cent of the urban level.

This urban bias emerged at least partly due to the dominance of a powerful urban-industrial elite from the Southern coastal regions—a segment which germinated after China’s initial integration into the global economy, expanded its financial resources and political influence with the export boom, and became increasingly adept at shaping central government policy in its favour.

The result of this urban bias has been relative economic stagnation in the countryside and a concomitant fiscal stringency on the part of rural local governments. From the 1990s onwards, the deterioration of agricultural incomes and the demise of collective rural industries—the township and village enterprises (TVEs) which used to be vibrant generators of employment in the early stages of market reform—forced most young labourers in the countryside to leave for the city, creating a vicious cycle which has precipitated a rural social crisis. China’s agrarian sector was not only neglected, however, it was also exploited in support of urban growth. A recent study has found that there was a sustained and increasing net transfer of financial resources from the rural-agricultural to the urban-industrial sector between 1978 and 2000, both through fiscal policy (via taxation and government spending) and the financial system (via savings deposits and loans).  The annual rural to urban capital transfer mounted from 75.2 billion yuan in 1990 to 409.1 billion yuan in 2000, as measured in constant 2000 price.

The PRC’s urban-biased development model, then, is the source of China’s prolonged ‘limitless’ supply of labour, and thus of the wage stagnation that has characterized its economic miracle. This pattern also accounts for China’s rising trade surplus, the source of its growing global financial power. However, the low wages and rural living standards that have resulted from this development strategy have constrained China’s domestic consumer market and deepened its dependence on the global North’s consumption demand, which increasingly relies on massive borrowing from China and other Asian exporters.

Obstacles to rebalancing

Chinese and East Asian governments have employed their foreign reserves to purchase US debt not only in search of presumably stable and safe returns, but also as part of a deliberate effort to finance America’s escalating current-account deficit, and hence secure a continuous increase in US demand for their own exports. But the deficit cannot expand indefinitely, and could eventually result in the collapse of the dollar or the Treasuries market and a hike in interest rates, putting an end to America’s consumption spree. This would not only be a mortal blow to China’s export engine, but would also decimate its global financial power through a drastic devaluation of its pre-existing investments.

Besides exposing the country to the vicissitudes of global markets, China’s export-oriented model has drastically curtailed consumption. As noted earlier, the PRC’s export competitiveness has been built upon long-term wage stagnation, which arose in turn from an agrarian crisis under an urban-biased policy regime. Rather than sharing a greater part of profits with employees and raising their living standards, the thriving export sector has turned most of its surplus into enterprise savings, which now constitute a large proportion of aggregate national savings. Official statistics show that from the late 1990s onwards total wages as a share of GDP declined from 52.8 % in 1997 to 39.7% in 2007, in tandem with a fall in private consumption share from 46.8% to 37.4%. These two downward trends contrast starkly with the mounting scale of corporate profits as share of GDP, which rose from 20.4% in 1997 to 31.3% in 2007. Although private consumption has risen by 15 times between 1990 and 2008, it is far from matching the 37-fold growth in fixed asset investment over the same period.

Having established as the center of an Asian production network, China imports a large quantities of capital goods, manufactured components and natural resources from Japan, the Four Dragons, Southeast Asia and elsewhere, and then assembles them into final products to be sold in the consumption market in the global North. But China has yet to actualize much of its potential as a key importer of finished consumer goods from other Asian manufacturers.

In an attempt to initiate a rebalancing of China’s development, the central government had tried from 2005 to fuel domestic consumption by boosting the disposable income of peasants and urban workers. The first wave of such initiatives included the abolition of agricultural taxes and a rise in government procurement prices for agricultural products. Though these measures to raise rural living standards were no more than a small step in the right direction, their effect was instantaneous. Slightly improved conditions in the rural-agricultural sector slowed the flow of migration to the cities, and a sudden labour shortage and wage hike in the coastal export-processing zones ensued, inducing many economists to declare that the Lewisian Turning Point—at which rural surplus labour has been exhausted—had finally arrived.

Just as China’s ‘unlimited’ supply of labour was more a consequence of policy than a natural precondition of its development, the arrival of the Lewisian Turning Point(刘易斯拐点) was in fact the outcome of state attempts to reverse a previous urban bias rather than of a process driven by the market’s invisible hand. The concomitant to rising peasant income and industrial wages was unprecedented, soaring retail sales, even controlled for inflation. But no sooner had the government taken its first step toward domestic consumption-driven growth than vested interests in the coastal export sector complained loudly about their worsening prospects. They asked for compensating policies to safeguard their competitiveness, and attempted to sabotage further initiatives to raise the living standards of the working classes, such as the New Labour Contract Law劳动合同法 and the managed appreciation of the yuan.


When the global crisis struck and China’s export engine stalled, the PRC immediately rolled out a mega-fiscal-stimulus package amounting to US $570 billion (4万亿投资) in November 2008. Many initially celebrated this massive intervention as a precious opportunity to accelerate the rebalancing of the Chinese economy towards domestic consumption, and expected that the stimulus would consist principally of social spending—such as financing for medical insurance and social-security accounts—which could further raise the disposable income and hence purchasing power of the working classes. However, no more than 20 per cent of the stimulus package was in fact allocated to social spending; the large majority went to fixed-asset investment in sectors already plagued by overcapacity, such as steel and cement, and in the construction of the world’s biggest high-speed rail system, whose profitability and utility are uncertain. Without providing much assistance to social-welfare institutions or small and medium labour-intensive enterprises, the stimulus package will generate only limited improvements in disposable income and employment. Worse, the central government, seemingly horrified by the sudden collapse of the export sector, retreated from its rebalancing efforts and resumed a number of export-promotion measures, such as rebates on value-added taxes on exports and halting the appreciation of the yuan. Some representatives of these sectors even made use of the crisis to call for a suspension of the 2007 New Labour Contract Law for the sake of their survival.

Despite its impressive size, the fiscal stimulus will do little to promote domestic consumption and hence reduce China’s export dependence. Though a large quantity of funds was directed to the Western provinces to redress the development gap between coastal and inland areas, the mostly capital-intensive, urban-oriented growth promoted by the stimulus has actually aggravated the rural–urban polarization. While the urban investment continued to be about 6 times larger than rural investment in the first six months of 2009, continuing a serious urban bias in investment in recent years, the difference in growth rate of urban income and rural income, which narrowed from 3.4 % point in 2005 to 2.7% point in 2007 and 0.4 point in 2008, grew back to 3.1 point in the first half of 2009. This has put a brake on the relative rise in rural living standards since 2005, which had helped fuel modest growth in domestic consumption.

What the massive spending actually does is to keep the economy roaring with a state-led investment spurt in the short run, while waiting for the export market to turn around. By the summer of 2009, data showed that the stimulus had successfully halted the free fall of the Chinese economy and fostered an impressive rebound. But at the same time, nearly 90 per cent of GDP growth in the first seven months of 2009 was driven solely by fixed-asset investments fuelled by a loan explosion and increased government spending. Many of these investments are inefficient and generally unprofitable (profit in major industrial establishment in the first eight months of 2009 is 10.6 % lower than the profit in the same period in 2008, in stark contrast to the annual profit growth which has been higher than 20% in preceding years). If the turnaround of the export market does not come in time, the fiscal deficit, non-performing loans and the exacerbation of overcapacity will generate a deeper downturn in the medium term. In the words of a prominent Chinese economist Xu Xiaonian, this mega-stimulus programme is like ‘drinking poison to quench a thirst’.


Over the course of the last two decades, China has emerged as the final assembler and exporter in an East Asian network of production. It has also attained the status of largest creditor to the US and largest holder of foreign reserves, and demonstrated the potential to become the market of the world in addition to being its workshop. China is thus well poised to carve out a new regional and global economic order by helping Asia and the global South to move out of their market and financial dependence on the North in general and the US in particular.

China’s potential to lead, however, is far from being actualized. So far, the PRC’s strategy of lending to the US to facilitate purchases of Chinese exports has only deepened China’s, as well as its suppliers’, dependence on American consumers and the US bond market, making them vulnerable to any turbulence in the global economy. The PRC’s long-term export competitiveness is rooted in a developmental approach that bankrupts the countryside and prolongs the unlimited supply of low-cost migrant labour to coastal export industries. The resultant ever-increasing trade surplus may inflate China’s global financial power, in the form of expanded holdings of US debt, but the long-term suppression of wages restrains the growth of China’s consumption power. The current financial crisis, which has decimated consumer demand in the global North and increased the likelihood of a collapse of the US bond market and the dollar, is a belated wake-up call for an urgent change of course.

Beijing is well aware that further accumulation of foreign reserves is counterproductive, since it would increase the risk associated with the assets China already holds or else induce a shift to ever riskier ones. The government is also very aware of the need to reduce the country’s export dependence and stimulate the growth of domestic demand by increasing the working classes’ disposable income. Such a redirection of priorities has to involve moving resources and policy preferences away from the coastal cities to the rural hinterland, where protracted social marginalization and underconsumption have left ample room for improvement.

But the vested interests that have taken root over several decades of export-led development make this a daunting task. Officials and entrepreneurs from the coastal provinces, who have become a powerful group capable of shaping the formation and implementation of central government policies, are so far adamant in their resistance to any such reorientation. This dominant faction of China’s elite, as exporters and creditors to the world economy, has established a symbiotic relation with the American ruling class, which has striven to maintain its domestic hegemony by securing the living standards of US citizens, as consumers and debtors to the world. Despite occasional squabbles, the two elite groups on either side of the Pacific share an interest in perpetuating their respective domestic status quos, as well as the current imbalance in the global economy.

Unless there is a fundamental shift in the balance of power from the coastal urban elite to forces that represent rural grassroots interests, China is likely to continue leading other Asian exporters in supporting the economic vitality of —and being held hostage by—the US. The Anglo-Saxon establishment has recently become more respectful towards its Asian partners, inviting China to become a ‘stakeholder’ in a ‘Chimerican’ global order, or ‘G2’. What they mean is that China should not rock the boat, but should continue to help maintain American economic dominance. This would enable Washington to buy precious time to secure its command over emergent sectors of the world economy through debt-financed government investment in green technology and other innovations, and hence remake its ailing supremacy into a green hegemony. This seems to be exactly what the Obama administration is betting on as its long-term response to the global crisis and declining American power.

If China were to re-orient its developmental model and achieve greater balance between domestic consumption and exports, it could not only free itself from dependence on the collapsing US consumer market and addiction to risky US debt, but also benefit manufacturers in other Asian economies that are equally eager to escape these dangers. More importantly, if other emerging economies were to pursue a similar re-orientation and South–South trade were to deepen, then they could become one another’s consumers, ushering in a new age of autonomous and equitable growth in the global South.

China has successfully met the 8 % GDP growth target for 2009 despite all gloomy predictions, and has demonstrated to the world that it can overcome any difficulties so far as it is determined. Now it is time for the government to transform the self-confidence arising from the economic recovery to the courage to disregard any opposition from the vested interests defending the current imbalanced growth, and push forward the long overdue redistributive reform that could raise ordinary people’s income and consumption power. Provided with the lethargic consumption market of Western countries and the increasing risk of protectionism, this big step of China is crucial not only to the well-being of the Chinese people and the recovery’s sustainability, but also to the vitality of other productive economies in Asia and the developing world.

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Ho-fung Hung is an assistant professor at the Department of Sociology, Indiana University. He received his Ph.D from Johns Hopkins University in 2004. Professor Hung researches and publishes on contentious politics, globalization, nationalism, and social theory. His current projects include one that expounds how the Confucianist legacy shaped China’s trajectories of state formation and popular protests from the eighteenth century to the present, in contrast to the Western trajectories. Another project examines the dynamics and limits of the current economic ascendancy of China, as well as its impact on global capitalism. A third project traces China’s changing conception of nationhood in light of Beijing’s contentious interaction with Tibet, Hong Kong and Taiwan since 1949. Besides these major projects, he also published about the orientalist origins of classical social theories, globalization of epidemics, China’s environmental movements, among others.
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