Will China Push the Global Economy Like Ten Years Ago? Maybe Not

This is the translation of an article by Ralf Ruckus which appeared in the Swiss weekly WOZ on September 3, 2020. It describes the economic crisis that followed the outbreak of the COVID-19 pandemic in China and elsewhere and discusses differences between the current slump and the crisis after 2007 – namely the different position China has today in the global economy and the intensified confrontation with the US regime.

In the course of the pandemic, the Chinese economy collapsed. However, since the containment of the virus, it seems to be on the course of recovery. Some already speculate that China will again act as growth engine for the global economy, like during the economic crisis a decade ago.. That is doubtful, though.

In recent months, the confrontation between the governments of the USA and China has intensified considerably. Back in January 2020, the ‘trade war’ between the two governments was suspended with a partial so-called ‘Phase 1’-agreement, but with the Covid-19-pandemic and its dramatic economic consequences the agreement was pushed to the background.

In China, the pandemic broke out in January. The lockdown led to a 6.8 percent slump in economic output in the first quarter of this year. However, after initial difficulties, the government managed to isolate the pandemic regionally. Not only central government institutions and coercive measures played a role in this, but also the mobilization of local structures in neighborhoods and in the health sector.

The economy also started to pick up again as early as in March. The government’s financial support measures concentrated on supporting businesses rather than the population. Millions of migrant workers and urban precarious workers were and are particularly affected by plant closures, layoffs, forced leave and wage cuts. Daniel Fuchs from the Institute for Asian Studies at Humboldt University in Berlin points to the “clear class dimensions of the political reaction to the crisis.” Official unemployment in February was 6.2 percent, but unofficial estimates speak of up to 20 percent. According to Cui Zhiyuan, political scientist at Tsinghua University in Beijing, more than 25 million jobs were lost in the cities alone as a result of the pandemic.

Rapid Easing Up

Despite these problems, there have been no major labor disputes in the country. Wages had already stagnated before the pandemic, and workers increasingly had to cope with precarious employment and job losses. Apart from the rapid containment of the pandemic, another decisive factor here was that the situation had already eased somewhat in the second quarter, when the Chinese economy grew by 3.2 percent according to official figures and industrial production also picked up again. According to media reports, China’s economy could grow no less than 2.2 percent this year.

By contrast, no growth can be expected in Western Europe, the USA and Latin America. Here, the pandemic really took off in March, and the lockdown measures also resulted in enormous economic slumps. Unlike China, however, the governments of the USA and Brazil were unable to contain the pandemic quickly, and Western Europe is currently expecting a second wave of the pandemic. Although government measures in the US and Europe have also handed out massive financial aid to cushion the social costs, uncertainty about the pandemic remains, unemployment is still high, and in regions which have seen some economic recovery it has been slower than in China.

Beijing Has No New Ideas

In comparison, China’s government and economy appear to have emerged stronger from the pandemic so far. However, it is doubtful that the development after the crisis of 2007 will be repeated. Back then, China’s massive economic stimulus package initiated an economic recovery in the country and then also in other regions of the world. Back then, the crisis started outside China and was triggered by economic factors. China’s economy had previously grown significantly, workers’ wages had improved and employment had grown. The country’s debts were still low, and the stimulus package took effect quickly.

In 2020, however, the pandemic was triggered by a non-economic factor in China. Economic growth has been stagnating for years, the same goes for workers’ wages. The country has been highly indebted since the last crisis, and the government’s economic stimulus package is significantly smaller in comparison to the much higher economic output. China’s government has, indeed, been able to partially solve some of the structural economic problems over the past decade. For example, the country’s still enormous dependency on exports declined significantly since 2007, the increase in debts has flattened in recent years, the manufacturing industry produces more high-value goods, and the country has continued to catch up technologically. Other problems, however, remain or have even worsened before and during the current crisis: social inequality continues to grow, consumer demand is low, economic growth is heavily dependent on state infrastructure investments, there are repeated labor shortages, and China remains dependent on certain technology imports.

Economist Isabella Weber from the University of Massachusetts Amherst emphasizes in an interview the “threefold challenge” for China’s government: “the debt dynamics, the dependency on imports and exports, and the macroeconomic collapse after the pandemic,” a situation that she believes is significantly “more complex” than the situation after 2007. However, China’s government seems to have few new ideas for the time being. The strategy of “dual circulation” announced by state leader Xi Jinping in May, an awkward formulation for the greater promotion of the domestic economy while securing certain foreign technologies and investments, has been pursued in a similar form since the end of the 2000s.

What distinguishes the current development from that after 2007, however, is above all the changed geoeconomic and -political situation. Despite recently lower growth rates, China’s GDP has roughly tripled since the end of the 2000s. The government has been focusing on global economic expansion since 2013. It seeks to reach global leadership in advanced technologies and has specifically strengthened large state-owned companies. And it has transformed the country into a regional military power that asserts spheres of influence and land claims as in the South China Sea or in the border region with India. Whether in Asia, Africa, Latin America or Europe, China’s government is challenging the former hegemonic power, the United States, everywhere, building up transport routes, trade networks and financial institutions it dominates and supporting the global expansion of Chinese companies. Recently, it has also been more self-confident and resolute when reacting to political attacks from Washington, and it has broken sanctions imposed by the U.S. government, as in Iran, with which China’s government has just signed a long-term cooperation program.

While the top priority after 2007 was to overcome the global crisis, in 2020, the governments in Beijing and Washington seek to exploit the crisis for their own interests. This also explains the US government’s confrontational course in the past months. With the economic slump in the USA – and in view of the negative consequences for the Trump government in the upcoming presidential elections – the truce in the “trade war” was quickly forgotten. The US government blamed China for the worldwide spread of the pandemic. Together with the Democratic Party in the U.S. Parliament, it has initiated a series of laws threatening sanctions against Chinese companies and politicians in connection with China’s intervention in Hong Kong, repression in Xinjiang and Tibet, the militarization in the South China Sea, and threats to data security by Chinese companies such as Huawei. Further restrictions are being prepared, for example on the access of Chinese companies to U.S. stock exchanges. A possible government under the Democrat Joe Biden is unlikely to change this policy significantly.

Will there be a Decoupling?

The economies of the US and China have been closely linked by trade and production chains since the 1990s, but this so-called “Chimerica” constellation has been disintegrating for some time – also due to measures taken by China’s government since the crisis after 2007. Today, some members of the US government publicly advocate a proper “decoupling” of the two economies. Tendencies of a certain decoupling were already evident when, in the course of the “trade war”, global supply companies began to look for alternatives to production facilities in China. In addition to an increasing bifurcation of trade and production chains, a similar split seems possible regarding the Internet and in the financial sector. These decoupling processes show how the “struggle of capitalisms” intensifies, as China researcher Stefan Schmalz from the Free University of Berlin calls the conflict between the power blocs in an interview.

This development resembles the conflict between the hegemonic power Great Britain and the emerging power Germany at the end of the 19th century which ultimately culminated in the First World War. Today, governments and companies in the EU, in the ASEAN states and elsewhere have no interest in taking sides, given their close economic ties with the USA and China. A forced decoupling could push the global economy further into deep crisis, and it could exacerbate the social consequences of such crisis in many places. In both the Global North and the Global South, it is primarily workers and the poor who will bear the consequences. Exploding social conflicts could undermine the legitimacy of many governments. The post-2007 crisis was followed by a worldwide cycle of riots and strikes until 2012, this time a similar cycle already preceded the current crisis in the second half of 2019. As social tensions persist in the wake of the pandemic and the connected economic collapse, the recent cycle might continue soon.