China has recently been in the eye of the storm for various geopolitical and human rights-related issues, but behind this there is a political and economic ambivalence that is holding back its development.
Osvaldo Cortesi is an Argentinean economist who has worked in management in various financial institutions such as the City of Buenos Aires Bank and the Bank for Investment and Foreign Trade (BICE), as well as in senior positions in the Argentinean Ministry of Finance and the Latin American Foundation for Economic Research.
Based on the French school of Sinology, which he claims to be the most relevant at a global level, Cortesi has been studying China’s economy and development processes and their global repercussions since 2000. He spoke to ReporteAsia about his work.
What is happening in the world today, and where does China enter the geopolitical game?
Changes are taking place in international economic and political relations, obviously accelerated by Russia’s invasion of Ukraine, which were already being hinted at and confronted since the Trump era. Before you had a great deal of corporate control of U.S. foreign policy. Now it is less, increasing the space for those who encourage national security.
Corporations were instrumental in China’s development, especially American corporations. Of course, corporations from Japan and Europe, Germans, above all, also came in. This is from the Reform and Opening up initiated by Deng in 1992 and accelerated by Clinton when he approved China’s entry into the WTO.
It is a central issue that, in the case of Argentina, when they say that the Chinese model should be copied, they don’t have the slightest idea of what it was like. In China it is the norm for workers – especially the more than 300 million migrant workers – to work 12 hours a day and with wages below their productivity (the surplus value is deliberately shared between corporations and the Chinese state). Wanting to copy China’s development seems like a joke for Latin America. The whole story needs to be told.
How does history help to understand China’s current moment?
The CCP leadership still has a Marxist background. In fact, Xi Jinping has ordered universities to create study institutes called Socialist Political Economy with Chinese Characteristics (SPECC), to think about how China will Sinicize Marxism and how it will adapt in a context where its development is beginning to have fundamental contradictions.
One of the most important is the contradiction that derives from real estate.
A peer of Deng Xiaoping, called Cheng Yun, proposed the theory of the freedom of the bird inside the cage. That was the theory behind the Special Economic Zones, the beginning of the development of the Chinese economy from 1992 onwards. The bird is more and more stressed in the cage.
All this led to the arrival of foreign corporations, China appropriated the technologies and offered the surplus value of the largest labor sector on the planet. The Chinese labor market is around 850 and 900 million people.
First what China did was to reform all the state enterprises and they left 40 million people on the street, but at the same time, as they generated a great economic opening, these people found work. So there is “no pain” in terms of labor. China did this at the end of the last decade of the century, and it was carried out by Zhu Rongji, the premier of Jiang Zemin.
This opening up made China develop in a dizzying, upwardly mobile way for 20 years. But the central point to bear in mind for the present moment is that at the same time as the growth of the manufacturing industry, China developed domestic investment in infrastructure, transport, roads, highways, but fundamentally in real estate, private construction with private property, based on foreign investment that accelerated after China’s entry into the WTO in 2001.
How do you understand the real estate boom in a country like China?
This was boosted from 2001 onwards. This great development of real estate reached 20 percent of China’s GDP. Total investment in recent decades in China has been around 45 percent of GDP; another 40 percent is consumption, which is very low in international terms. China is essentially frugal in terms of household spending. The rest is public sector.
Investment in infrastructure, especially in real estate, is what changed the demand for commodities at the international level. Particularly those linked to minerals, steel, iron, etc. China today is clearly dependent on iron ore from Brazil and Australia, copper from Chile and some African countries. All this made it possible for the average Chinese family to put their savings in real estate.
That is the central point, why did they save more in real estate than in any other country in the world? China has a huge fear of becoming a capitalist economy, with financial capitalism and capital market development. That is why [the leadership is promoting] Socialist Political Economy with Chinese Characteristics.
Is the Chinese capital market underdeveloped?
In China today there should be a market similar to Wall Street, of the same size. China’s economy is in the order of $17 trillion and the U.S. economy $22 trillion. However, savings are channeled into deposits and flats. It is no longer possible to build flats because they were in demand because their prices were rising, but now this has stopped. One of the great contradictions of the Chinese economy has surfaced.
Xi Jinping started to put his hand in from 2019-2020. All this real estate development was also heavily tied to the resources of the provinces. Today, Chinese provinces can no longer sell land for developers to build buildings. That has stopped. Now you have a real estate demand problem. Nobody wants a flat because they see that its value can continue to go down. Those who have a mortgage pay it and see that their flat is worth less. Developers have no liquidity.
So, China’s macroeconomy is trying to push through some revival mechanisms, through more public works. Among the plans are tunnels to bring water from the Yangtze to the north, which will be built in the next few years. All this infrastructure construction is the only way to compensate for the fall in real estate. Household consumption is contracting due to falling incomes and loss of value of real estate savings.
What does it mean for Chinese savers that the value of real estate is falling?
This is a huge contradiction in terms of China’s future development as it seeks to avoid becoming a more capitalist economy. It has to find a way to develop the capital markets and also to allow capital to come in: for a foreigner to invest in the capital market in China.
They would have to have a very active capital market and stop saving in flats. To transfer income from the present to the future is to transfer it in liquid form, not through flats. That is freezing assets. The CCP is afraid of a very consumerist China with highly developed capital markets.
This is the essence of China, I call it the Millennium Wall Mentality (MWM). Today foreigners owning financial assets inside China do not exceed 1.5 percent of total assets. That is not the case in the United States or Europe.
China does not have that liquidity, and that is a central issue why I believe that the global process we are seeing today will have a different evolution than in the last two decades because of the adjustment problems in the Chinese economy.
Where is China’s weakness today holding back its development?
China is planning a trade surplus of $1 trillion by 2022. It will export around $3.3 trillion and import $2.3 trillion. This is the strength of China’s large manufacturing industry, but it is also a weakness because it is not producing more domestic consumption – precisely because of the consequences of the real estate problem, to which the COVID-19 effect was added.
Structurally, China has a large production and export capacity, so it needs markets to dump products. ASEAN, Africa or Latin America are not enough; it needs the United States and Europe.
China has allied itself with Russia, which is now in conflict with Europe. We are at a great moment of global macroeconomic reconfiguration and of trade relations, value chains and financial relations. In a context of great global uncertainty, what is appreciating is the dollar, not because the United States has the most powerful industry on the planet, but because of the greater security it provides investors.
In 2008, the ratio of the dollar to the Euro was 1.60, today it is 1. The Chinese currency is devaluing, despite a projected surplus. This would never have happened in the 1980s. When Japan and Germany had large trade surpluses from selling to the United States, the Treasury Department put together the Plaza Accord, whereby both countries were forced to revalue their currencies to curb the competitive advantage they had against the dollar.
This should be happening with China today, but it is not. The United States does not have the power to force the Chinese to revalue their currency.
How do you explain the CCP going against Chinese companies themselves?
You can see this in China’s own history. The first authority was the emperor, then there were the educated, the peasantry, the artisans, and finally the merchants. The merchant today is Alibaba. Merchants were always regarded with suspicion. In China, I think that is still the case. An entrepreneur like Jack Ma, with all the development of innovation and deepening of economic activities, becomes a power in his own right, and that is not possible in China.
The Chinese have an age-old need to control the capitalism of entrepreneurs.
But it is an attack on the generators of wealth.
If we go to the financial issue, the control over the financial system is very strong. The banks where the Chinese save are still the public banks, to which the regional banks have been added. Only now have they opened the door to some fund managers like Black Rock or JP Morgan, but the authorities have them under control. I think there is a fear of the development of the capital market as if it were Wall Street, because the CCP could lose control. If you free up the capital market, the Chinese, who have a long-established culture of controls, will tend to turn this large capital market into a monumental, unmanageable casino. That affects the macroeconomy.
Many savers in the world would distribute their portfolios and take some of it to China. If this were to happen, you would have to manage the exchange rate, the relationship between internal and external prices. If the exchange rate price goes up, wages go up and it becomes less competitive. For such a labor market, it would be really complicated.
Considering the macroeconomics and the MWM culture, I think it is impossible for the renminbi to replace the dollar as the international currency. The dollar is the most important weapon the United States has, not only its production and innovation capacity, but also its warfare capacity.
What about China’s attempts to impose the renminbi for certain transactions with blockaded or allied countries?
China tried its own SWIFT-like system for international transactions, but it only succeeded among a few peripheral countries. It is very difficult to get people to save in Chinese currency, because it does not guarantee liquidity and this control mentality, which was also seen in the way they dealt with COVID-19, marks the risk that must be taken with an investment in that currency. In the United States you get in and out of an investment immediately. That is why I say that the dollar is one of the most powerful weapons they have today.
In the 1960s, Charles de Gaulle’s finance minister, Valéry Giscard d’Estaing, later president, spoke of the dollar as an “exuberant privilege” of the United States.
On the other hand, the United States has a huge trade deficit, so why doesn’t it devalue its currency? Because capital is flowing in for security and income. The Fed has been raising interest rates to control inflation.
How can this confrontation between the United States and China continue in economic terms?
From my point of view, the United States is pursuing a policy of seeking allies to avoid Chinese hegemony, for example, in manufacturing. In 20 years China has become 28 percent of the global manufacturing industry. On the other hand, it imports commodities, minerals, proteins, oil. But it processes and exports, and this is a phenomenon that has been giving China greater monopoly power, as the only one that sells, and monopsony, as the only one that buys, or the one that buys the most, so it imposes conditions.
We are beginning to go through this in the world in terms of economic relations. For example, the countries that make up ASEAN, such as Vietnam or Malaysia, are going to have a relative increase in the structure of global manufacturing. They are countries that are more friendly with the United States.
Vietnam, with its 110 million people, is functioning as an organized, planned, privately owned economy, with many international corporations investing, and it is going in the path of what Japan’s development was in the 1960s and 1970s.
Vietnam has already attracted some large multinationals such as Apple and Samsung to produce within its territory. How does this affect China?
China needs to consume more than it produces. The big discussion is whether China will Sinicize Marxism or Sinicize capitalism. The internal contradictions in China are getting stronger and stronger. We are moving toward a global capitalist market system, but with states managing to resolve the large income asymmetries that will continue to grow given the technological changes that affect labor markets.
Technological advances, the other major driver of economic development, produce concentration and accumulation that needs to be invested. Your capacity to spend on investment increases and you have to dump it on other economies (imperialism). It happened to England, it happened to the United States, and it is happening to China.
China will be forced to make internal changes. You cannot be a big capitalist producer with relatively low consumer spending. China’s internal debate is increasingly active between the new left and the liberals. That is why I advise following the work of the SPECC. This is going to intensify in the coming years. Perhaps we will have some signals in the way Xi Jinping is re-elected and who are the new top officials of the Chinese establishment, the Politburo and the Central Committee, who will accompany Xi in the times ahead.
This interview was first published in Spanish in ReporteAsia.