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Tomgram: Dilip Hiro, The Newest Superpower


Tomgram: Dilip Hiro, The Newest Superpower | TomDispatch.com

What will China become in this century? There can hardly be a more important question to ask. TomDispatch regular Dilip Hiro, who has followed shifting global power balances as the planet's former "sole superpower" edged into decline, offers a vivid picture below of a potential rising superpower weathering bad times as we head toward a multipolar planet.

There is, however, a more negative take on where China might be headed. Consider, for instance, Peter Kwong's recent article, "No Reform or Relief in China," which suggests a far more dismal view of that country's circumstances, or James Fallows's fascinating recent essay in the Atlantic, "Interesting Times," which presents a China capable of using this harsh economic moment (as the U.S. may not) to launch a new Great Economic Leap Forward, but offers a striking summary of the bad news in store for China right now. I find Hiro persuasive largely because I've long been convinced that American power is in decline, but I have my own caveats when it comes to China's future success. For one thing, I'm old enough to remember the period in the 1980s when Japan was being pre-anointed as the new economic superpower of Planet Earth. (There was even a much-touted book then entitled, "Japan as Number One: Lessons for America.")

Perhaps China really will be the future number one with plenty of "lessons for America," but its export-heavy economy is, at the moment, deeply dependent on the fate of a staggering U.S. economy (and the health of the dollar). Meanwhile, China's Communist Party, having thrown its revolutionary ideology to the dogs long ago, now rests its rule on a foundation which can be summed up in an old post-Maoist phrase, "to get rich is glorious" -- and, of course, on the repressive power of the state. It's a one-party government tightly bound to "success." Who knows what the impact of full-scale failure, thanks to a prolonged global or American crash, might mean?

With that in mind, let me raise an overlooked subject. There are many ways in which China, as a civilization, is impressively unique. (After all, how many places on the planet had antique stores in the fourteenth century?) But in one way it is surely unmatched: its 2,000-year-old tradition in bad times of vast millenarian peasant rebellions sweeping out of the hinterlands and threatening faltering dynasties.

From the Yellow Turban rebellion by a Taoist messianic sect in 184 CE to Mao ZeDong's Communist revolution of the 1930s and 1940s, these uprisings have been legion. Such a peasant rebellion felled the Ming dynasty in the mid-seventeenth century; the great Taiping rebellion, led by a guru with a new, partially Christian religion of his own, almost toppled the next dynasty, the Ching, in the 1850s and 1860s (an estimated 20 million people died in the process); and on a smaller scale, there was the Boxer Rebellion at the end of the nineteenth century, followed just more than a half-century later by the victory of Mao's peasant revolution. Yes, Russia had a few peasant rebellions, Brazil had one in its backlands, and France had its revolution as well as its revolt in the Vendée, but there's nothing on Earth like China's rebellious tradition.

You can be sure that its present leadership understands this history well; hence, though no one here thinks about it this way, the overwhelmingly repressive reaction to the Falun Gong religious sect. Its leaders also undoubtedly understand that the present state religion of "growth" is sacrosanct and, for the moment, dangerously in abeyance as what are called "mass incidents" (protests) rise. There are already an estimated 20 million unemployed migrant workers in the country. It's not that some as yet unimaginable modern version of a traditional peasant rebellion is on the horizon, but given the present economic meltdown and China's history, it shouldn't be ruled out as we try to imagine that country's fate as a possible future superpower.

Now, let Dilip Hiro introduce you to what nonetheless makes China economically remarkable, even in our meltdown moment. Tom

Defying the Economic Odds
The World Melts Down, China Grows
By Dilip Hiro

In the midst of the worst economic crisis since the Great Depression, a new world order is emerging -- with its center gravitating towards China. The statistics speak for themselves. The International Monetary Fund (IMF) predicts the world's gross domestic product (GDP) will shrink by an alarming 1.3% this year. Yet, defying this global trend, China expects an annual economic growth rate of 6.5% to 8.5%. During the first quarter of 2009, the world's leading stock markets combined fell by 4.5%. In contrast, the Shanghai stock exchange index leapt by a whopping 38%. In March, car sales in China hit a record 1.1 million, surpassing the U.S. for the third month in a row.

"Despite its severe impact on China's economy," said Chinese President Hu Jintao, "the current financial crisis also creates opportunity for the country." It can be argued that the present fiscal tsunami has, in fact, provided China with a chance to discard its pioneering reformer's leading guideline. "Hide your capability and bide your time" was the way former head of the Communist Party Deng Xiaoping once put it. No longer.

Recognizing that its time has indeed come, Beijing has decided to play an active, interventionist role in the international financial arena. Backed by China's $2 trillion in foreign exchange reserves, its industrialists have gone on a global buying spree in Africa and Latin America, as well as in neighboring Russia and Kazakhstan, to lock up future energy supplies for its ravenous economy. At home, the government is investing heavily not only in major infrastructure, but also in its much neglected social safety net, its health care system, and long overlooked rural development projects -- partly to bridge the increasingly wide gap between rural and urban living standards.

Among those impressed by the strides Beijing has made since launching its $585 billion stimulus package in September is the Obama administration. It views the continuing rise in China's GDP as an effective corrective to the contracting GDP of almost every other major economy on the planet, except India's. So it has stopped arguing that, by undervaluing its currency -- the yuan -- with respect to the U.S. dollar, China is making its products too cheap, thus putting competing American goods at a disadvantage in foreign markets.

The Secret of China's Success

What is the secret of China's continuing success in the worst of times? As a start, its banking system -- state-controlled and flush with cash -- has opened its lending spigots to the full, while bank credit in the U.S. and the European Union (EU) still remains clogged up, if not choked off. Therefore, consumer spending and capital investment have risen sharply.

Ever since China embarked on economic liberalization under the leadership of Deng Xiaoping in 1978, it has experienced economic ups and downs, including high inflation, deflation, recessions, uneven development of its regions, and a widening gap between the rich and the poor, as well as between the urban and the rural -- all characteristics associated with capitalism.

While China's Communist leaders have responded with a familiar range of fiscal and monetary tools like adjusting interest rates and money supply, they have achieved the desired results faster than their capitalist counterparts. This is primarily because of the state-controlled banking system where, for instance, government-owned banks act as depositories for the compulsory savings of all employees.

In addition, the "one couple, one child" law, enacted in 1980 to control China's exploding population, and a sharp decline in the state's social-support network for employees in state-owned enterprises, compelled parents to save. Add to this the earlier collapse of a rural cooperative health insurance program run by agricultural cooperatives and communes -- and many Chinese parents were left without a guarantee of being cared for in their declining years. This proved an additional incentive to set aside cash. The resulting rise in savings filled the coffers of the state-controlled banks.

On top of that came China's admission to the World Trade Organization (WTO) in 2001, which led to a dramatic jump in its exports. An average economic expansion of 12% a year became the norm.

When the credit crash in North America and the EU caused a powerful drop in China's exports, throwing millions of migrant workers in the industrialized coastal cities out of work, the authorities in Beijing focused on controlling the unemployment rate and maintaining the wages of the employed. They can now claim an urban unemployment rate of a mere 4.2% because many of the laid-off factory workers returned to their home villages. Those who did not were encouraged to enroll in government-sponsored retraining programs to acquire higher skills for better jobs in the future.

Whereas most Western leaders could do nothing more than castigate bankers filling their pockets with bonuses as the balance sheets of their companies went crimson red, the Chinese government compelled top managers at major state-owned companies to cut their salaries by 15% to 40% before tinkering with the remuneration of their workforce.

To ensure the continued rapid expansion of China's economy, which is directly related to the country's level of energy consumption, its leaders are inking many contracts for future supplies of oil and natural gas with foreign corporations.

Energy Security

Once China became an oil importer in 1993, it proved voracious. Its imports doubled every three years. This made it vulnerable to the vagaries of the international oil market and led the government to embed energy security in its foreign policy. It decided to actively participate in hydrocarbon prospecting and energy production projects abroad as well as in transnational pipeline construction. By now, the diversification of China's foreign sources of oil and gas (and their transportation) has become a cardinal principle of its foreign ministry.

Conscious of the volatility of the Middle East, the leading source of oil exports, China has scoured Africa, Australia, and Latin America for petroleum and natural gas deposits, along with other minerals needed for industry and construction. In Africa, it focused on Angola, Congo, Nigeria, and Sudan. By 2004, China's oil imports from these nations were three-fifths the size of those from the Persian Gulf region.

Nearer home, China began locking up energy deals with Russia and the Central Asian republic of Kazakhstan long before the current collapse in oil prices and the global credit crunch hit. Now, reeling from the double whammy of low energy prices and the credit squeeze, Russia's leading oil company and pipeline operator recently agreed to provide 300,000 barrels per day (bpd) in additional oil to China over 25 years for a $25 billion loan from the state-controlled China Development Bank. Likewise, a subsidiary of the China National Petroleum Corp agreed to lend Kazakhstan $10 billion as part of a joint venture to develop its hydrocarbon reserves.

Similarly, Beijing continued to make inroads into the oil and gas regions of South America. As relations between Hugo Chavez's Venezuela and the Bush administration worsened, ties with China strengthened. In 2006, during his fourth visit to Beijing since becoming president in 1999, Chavez revealed that Venezuela's oil exports to China would treble in three years to 500,000 bpd. Along with a joint refinery project to handle Venezuelan oil in China, the Chinese companies contracted to build a dozen oil-drilling platforms, supply 18 oil tankers, and collaborate with PdVSA, the state-owned Venezuelan oil company, to explore new oilfields in Venezuela.

During Chinese Vice President Xi Jinping's tour of South America in January 2009, the China Development Bank agreed to loan PdVSA $6 billion for oil to be supplied to China over the next 20 years. Since then China has agreed to double its development fund to $12 billion, in return for which Venezuela is to increase its oil shipments from the current 380,000 bpd to one million bpd.

The China Development Bank recently decided to lend Brazil's petroleum company $10 billion to be repaid in oil supplies in the coming years. This figure is almost as large as the $11.2 billion that the Inter-American Development Bank lent to various South American countries last year. China had established its commercial presence in Brazil earlier by offering lucrative prices for iron ore and soybeans, the export commodities that have fuelled Brazil's recent economic growth.

Similarly, Beijing broke new ground in the region by giving Buenos Aires access to more than $10 billion in yuans. Argentina was one of three major trading partners of China given this option, the others being Indonesia and South Korea.

Will the Yuan Become an International Currency?

Without much fanfare, China has started internationalizing the role of its currency. It is in the process of increasing the yuan's role in Hong Kong. Though part of China, Hong Kong has its own currency, the Hong Kong Dollar. Since Hong Kong is one of the world's freest financial markets, the projected arrangement will aid internationalization of the yuan.

In retrospect, an important aspect of the G-20 Summit in London in early April centered around what China did. It aired its in-depth analysis of the current fiscal crisis publicly and offered a bold solution.

In a striking on-line article, Zhou Xiaochuan, governor of China's central bank, referred to the "increasingly frequent global financial crises" that have embroiled the world. The problem could be traced to August 1971, when President Richard Nixon took the dollar off the gold standard. Until then, $35 bought one ounce of gold stored in bars in Fort Knox, Kentucky -- the rate having been fixed in 1944 during World War II by the Allies at a conference in Bretton Woods, New Hampshire. At that time, the greenback was also named as the globe's reserve currency. Since 1971, however, it has been backed by nothing more tangible than the credit of the United States.

A glance at the past decade and a half shows that, between 1994 and 2000 alone, there were economic crises in nine major countries which impacted the global economy: Mexico (1994), Thailand-Indonesia-Malaysia-South Korea-the Philippines (1997-98), Russia and Brazil (1998), and Argentina (2000).

According to Zhou, financial crises resulted when the domestic needs of the country issuing a reserve currency clashed with international fiscal requirements. For instance, responding to the demoralization caused by the 9/11 attacks, the U.S. Federal Reserve Board drastically reduced interest rates to an almost-record low of 1% to boost domestic consumption at a time when rapidly expanding economies outside the United States needed higher interest rates to cool their growth rates.

"The [present] crisis called again for creative reform of the existing international reserve currency," Zhou wrote. "A super-sovereign reserve currency managed by a global institution could be used to both create
and control global liquidity. This will significantly reduce the risks of a future crisis and enhance crisis management capability."

He then alluded to the Special Drawing Rights (SDR) of the International Monetary Fund. The SDR is a virtual currency whose value is set by a currency "basket" made up of the U.S. dollar, the European euro, the British pound, and the Japanese yen, all of which qualify as reserve currencies, with the greenback being the leader. Ever since the SDR was devised in 1969, the IMF has maintained its accounts in that currency.

Zhou noted that the SDR has not yet been allowed to play its full role. If its role was enhanced, he argued, it might someday become the global reserve currency.

Zhou's idea received a positive response from the Kremlin, which suggested adding gold to the IMF's currency basket as a stabilizing element. Its own currency, the ruble, is already pegged to a basket that is 55% the euro and 45% the dollar. Within a decade of its launch, the euro has become the second most held reserve currency in the world, garnering nearly 30% of the total compared to the dollar's 67%.

Treasury Secretary Timothy Geithner's immediate reaction to Zhou's article was: "China's suggestion deserves some consideration." Nervous financial markets in the U.S. took this as a sign from the Treasury Secretary that the dollar was losing its primacy. Geithner retreated post-haste. And President Obama quickly joined the fray, saying: "I don't think there is need for a global currency. The dollar is extraordinarily strong right now."

Actually, maintaining the customary Chinese discretion, Zhou never mentioned the state of the U.S. dollar in his article, nor did he even imply that the yuan should be included in the super-sovereign currency he proposed. Yet it was clear to all that at a crucial moment -- with world leaders about to meet in London to devise a way to defuse the most severe fiscal crisis since the Great Depression -- that a China which had bided its time, even though it had the third largest economy on the planet, was now showing its strong hand.

All signs are that Washington will be unable to restore the status quo ante after the present "great recession" has finally given way to recovery. In the coming years, its leaders will have to face reality and concede, however reluctantly, that the economic tectonic plates are shifting -- and that it is losing financial power to the thriving regions of the Earth, the foremost of which is China.

Dilip Hiro is the author, most recently, of Blood of the Earth: The Battle for the World's Vanishing Oil Resources (Nation Books). His upcoming book After Empire: The Rise of a Multipolar World will be published by Nation Books this year.

Copyright 2009 Dilip Hiro

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