Why (Some) Conservatives Are Wrong About China

A bit of perspective helps correct misperceptions

 

 

Let me begin by saying I am a conservative.  So the comments below are not meant to be disparaging of those with whom I mostly agree.  However, having lived in China for 12 years and been involved in China for more than 20 years, I have had the opportunity to gain a perspective on China that differs from many other conservatives.  That’s why I feel an obligation to correct misunderstandings seem to exist simply due to a lack of familiarity.  Below I address some of the main misperceptions relative to China that seem to be held by many conservatives.

 

China is not manipulating its currency lower.

 

China currency, the RMB, has appreciated by more than 30% against the US dollar over the past 8 years.  The RMB’s recent 4-5% depreciation against the US dollar is actually very mild compared to the 10+% declines of most other currencies against the US dollar, including the Euro and the Yen, both of which fell more than 20% against the dollar before rebounding a bit over the last six months.  In large part because China’s economy is slowing, capital is flowing out of China which is driving the RMB lower.  China’s central bank has actually been supporting the RMB, not suppressing it.  The currency manipulation allegation is incorrect and out of date.

 

China is not stealing American jobs.

 

Not only has China’s currency appreciated significantly over the last 8 years, but wages have been growing at double digit rates for five years.  Yet, despite these increasing cost factors, China has actually maintained its global market share fairly well.  On the high end, like computers, electronics, and appliances, China has actually increased its global market share.  At the low end—clothes, toys, and footwear—China has lost market share, but not precipitously, and it is mostly Vietnam that has increased its share.  Meanwhile, the US has not seen a huge increase in manufacturing over this same period.  All of this serves to demonstrate that changes in manufacturing employment are the result of other factors—automation and the natural evolution of the US to a service economy—and not low costs from China.  Low costs from China actually help keep the standard of living in America lower.

 

China’s holdings of US debt is not a danger for the US

 

Some think that, because China holds more than USD 1 Trillion of US treasury bonds, the US is beholden to China in a way that makes the US vulnerable.  That simply isn’t the case.  The interdependence of the global economy means that everyone needs everyone else, and China is no exception.  China needs the US export market as well as American investment capital.  Intentionally hindering the US economy would only make it harder for China to grow.  Plus, if China precipitously sold-off its US Treasury bonds, it would take a hit on its investment and, to the extent it drove up US dollar interest rates, it would likely drive capital out of China and into the US.  Lastly, as a creditor, China has its own vulnerability.  China has to worry that, in order to pay its debts, the US will simply print money and thereby decrease the value of all outstanding bonds.  In fact, many would argue that has already happened.  It is reasonable to be worried about America’s debt level.  The fact that China holds a large part of the debt doesn’t make it more worrisome.

 

China is not changing the free market system

 

One of the greatest misapprehensions relative to China is that, as a nominally “communist” country in which the government takes a highly active role in the economy, China is somehow inventing a new type of economy that contradicts free market principles.  Nothing could be further from the truth.  The fact is that China is making a gradual transition from communism to capitalism.  Because the transition is gradual, China still has a heavy dose of government in the economy.  But there is no doubt that the private sector is the driving force for change in China.  The private sector creates 80% of new jobs and has either surpassed or is on the way to surpassing the state-owned sector in most important economic variables including R&D spending, overseas investment, brand value, and even per capita income (which is higher in areas with lower concentrations of state-owned companies).  China is growing because it is enabling the private sector.  If it stops doing that it will stop growing.

 

China is not (likely) to be a military threat.

 

The South China Sea is a potential hotspot.  The challenge of countering China’s ambitions in that area should not be underestimated.  Yet, working with allies in the region, the situation should be manageable without open hostilities.  Taking a broader view, it is important to note China’s military build-up is commensurate with its growing economy and to be expected from a country that is rising from poverty.  China’s government has staked its legitimacy on its ability to deliver economic growth which it has done by integrating with the global economy.  For this reason China has as much interest in global peace and stability as any other country which greatly decreases the likelihood that China will use its military in threatening or provocative manner.  Of course it is possible China will take action that requires a response which is why it reasonable for the US and its allies to counterbalance whatever military strength China develops, as is happening in the South China Sea and overall.  But the most important check on China’s rise is that it needs global peace and stability to continue it economic ascent.

 

The above is not meant to imply that China is above criticism or that China’s rise poses no risk whatsoever.  The rise of a new power always poses risk.  But to manage that risk we need to start by assessing it properly, not by overstating it.