Paul Jay: . . . How bad is unemployment in China now? And how much worse might it get if the yuan were to appreciate?
Minqi Li: Well, it’s reported that during the current crisis about 40 million Chinese workers have already lost jobs. And, of course, if there is a further appreciation of the Chinese currency, that will again hurt the Chinese export business, which is now about 15 percent down compared to a year ago. But, on the other hand, the point is that, because of the current US crisis, China cannot expect the US to depend on debt-financed consumption to lead the expansion of global economy like the situation before the crisis, so sooner or later, China will have to move from the export-led model of growth towards one that is led by domestic demand, especially household consumption.
Paul Jay: Now, if I were China, I would say to the United States, “You can’t sell me, you know, billions of dollars of your T-bills and bonds at one exchange rate, and then all of a sudden you want me to appreciate my currency, which means all my value of my holdings of your currency go down.” So China must say: “Well, why the heck should we? Why should we lend you money and then you reverse the whole game on us?”
Minqi Li: Well, of course, the point is that China right now is still depending on the export markets, depending on export to the US. So, that gives the US a little bit of leverage. But on the other hand, the US cannot expect to hold that leverage forever, because the US will not be able to return to the vigorous growth. That was what happened in the 1990s and the early 2000s based on the debt-financed consumption. So, one way or the other, these imbalances will have to be corrected in the coming years. The problem is that right now China is still not willing to abandon this export-led growth model. And so that may bring about a return of the global imbalances paving the way for the next round of global crisis.
Paul Jay: Now, an export-led model, in other words, is “let’s keep our labor cheap,” because —
Minqi Li: Very true. Very true.
Paul Jay: — if you were going to have a model based on a more vibrant domestic economy, you’d have to have more sharing of the wealth in China and raise wages in China, which isn’t something that they don’t seem to be doing.
Minqi Li: Right. Right.
Paul Jay: So if they’re going to keep the current status quo in China — cheap labor is one of their primary export products, in reality — can the US come back as the market? Or are they going to be at an impasse here, where you have cheap labor over here, but no real consumption over there?
Minqi Li: Yeah, that’s a very big question, because, before the crisis, the US economy was led by household consumption, which was in turn financed by the expansion of household debt. But now the households are going to increase savings, so you cannot expect consumption to lead the US economy. On the other hand, the US economy cannot rely on gigantic federal government deficits forever. Right now the federal government deficit is on the order of about $1.3 trillion a year and more than 10 percent of GDP. That cannot be sustained forever.
Paul Jay: Hang on. When you say that can’t be sustainable forever, there are a lot of economists that are saying that the American economy can go a lot further in terms of deficit, that there can be more stimulus, more printing of money, and that there almost is no end in sight for that because we’re in such a deflationary period right now. What do you make of that thesis?
Minqi Li: That could be true in the short run, maybe in the next one, two, or three years. But, if the US continues to accumulate deficits and the debt, after several years, the debt will be at much higher level. Also, if we do have some kind of global economic recovery, there would be a decline in the demand for the US Treasury bonds, and that might force a rise in the interest rate in the US and therefore make the US debt situation much less sustainable.
Paul Jay: Well, it does not look like anything is going to change in the United States in terms of higher wages. If anything, wages are going down the worse unemployment gets.
Minqi Li: Unfortunately.
Paul Jay: So, then, we will be heading, whether it’s two years or three years, towards this wall where you could say you can’t increase the deficit any further without vastly debasing the currency. Is this a debate going on in China? What I mean by that is: is there a point where China loses faith in the American economy? Or, on the other hand, are the two economies so enmeshed with each other they’re both in the same boat?
Minqi Li: Well, the basic problem for the Chinese economy right now is that it seems the Chinese leadership cannot quite make up their mind: on the one hand, they are still hoping that eventually the US will come back so they could again see a rapid increase of exports to the US; and on the other hand, they to some extent realize that this cannot go on forever. Then, you need to increase domestic consumption, but they don’t want to do the massive income redistribution required for that, so they are not sure how to sustain the expansion of domestic demand.
Paul Jay: So to what extent is China debating, and when Obama meets with Chinese leaders, do they say to him, “We’re not sure whether we have faith in the long-term viability of your economy”? Do they say that? Or are they in such a similar situation? I mean, a lot of people have suggested China’s kind of, to some extent, decoupling in this crisis. They’ve talked how GDP continues to grow in China and that maybe the Chinese economy’s not so dependent on the American market anymore.
Minqi Li: Well, right now China has come out of this crisis relatively well, sustaining a growth rate of 8 to 9 percent a year. But, that is largely based on the massive increase in bank loans, which in turn goes to infrastructure investment, and that, however, could lead to excess capacity in a few years. And also some of the investment goes to the real estate sector. So there are people who are concerned about a possible asset bubble in the real estate sector. So these are potential risks.
Paul Jay: So you’re talking about government stimulus money. This is state or government stimulus money you’re talking about.
Minqi Li: Right.
Paul Jay: And to what extent is this growth dependent on that stimulus money? I mean, is it a case that, when the stimulus money runs out, the economy starts to sputter, or not?
Minqi Li: Well, the latest statistics suggest that, for the first three quarters of this year, about 95 percent of the growth is coming from fixed investment. So, if this fixed investment cannot be sustained, there will be real trouble.
Paul Jay: I mean, can you imagine a world in the next five or ten years that simply adjusts to this situation, which is high, 10-15 percent unemployment in the United States, relatively low wages, not that much consumer debt — because of the crisis on the finance side, people don’t want to lend, give credit — and the rest of the world kind of readjusts and moves on based on the domestic market in India and China and Europe? I mean, is this a real possibility, or is it all so intertwined right now it heads towards another global crisis?
Minqi Li: Of course, one possibility is that it will just head to another crisis. But, if we think about a relatively optimistic scenario, in the US, we may have the consumers increasing saving, and, because the government deficit cannot be sustained forever, the US and maybe Europe will suffer from stagnation, but not collapse, in the coming years; on the other hand, if China will be able to sustain its growth through massive increases in investment, so long as the Chinese economy is growing rapidly, it will increase imports of machines and equipment from Japan and Europe, and it will increase imports of raw materials, energy, from Latin America and the Middle East. So that may contribute to a relatively rapid growth in the global economy for some years. But, if China’s investment cannot be sustained because of excess capacity, and also if China’s rapidly growing energy demand cannot be met by the constrained world energy supply (especially since there’s a concern that the world oil production may have peaked), then that may lead to the next crisis.
Paul Jay: But, you could have, for a time, a situation where American capital decides, well, we can make so much money in Asia, we don’t have to worry so much about domestic purchasing power in the United States. I saw on television a documentary the other day about Wal-Mart, and it turns out Wal-Mart, within, I think, three or four years, expects to have as many stores in China as in the United States, not just producing in China, but selling into the Chinese market. The number of stores in China may actually surpass that in the United States. I mean, you could have a situation where the American capital says, listen, we’ll make money where the expansion is, and — excuse my language — screw the American workers.
Minqi Li: Well, then, in that case, obviously, you will have a divergence of interest between the US corporations and the great majority of the US population, and that, unfortunately, will make a progressive change in the US even less likely.
Paul Jay: Well, you could have a situation where American workers have to decide they’d better do something to defend themselves or they’re going to be in real trouble here.
Minqi Li: Right. Yeah.
Minqi Li is Assistant Professor of Political Economy at the University of Utah. He was a political prisoner in China from 1990 to 1992. He is the author of The Rise of China and the Demise of the Capitalist World Economy. The text above is an edited partial transcript of the interview.