Liang Jing, Obama’s China Challenge
Overseas political commentator Liang Jing’s new piece, translated by Dr. David Kelly of the China Research Centre, University of Technology Sydney.
Today is the day of Obama’s swearing in, and the best wishes of all who support justice will go with him. Humanity has reached a crucial crossroads; Obama faces many major challenges, any major mistake in deciding some of which could mean global disaster. One of these is the challenge he faces regarding China.
An important clue for understand this is a warning issued to the world by Niall Ferguson, a professor at Harvard University. In 2005, when housing prices in many countries, including the US and Europe, were to reach a frenzied peak, Ferguson published an important article entitled “Sinking Globalisation” in Foreign Affairs.  Here he issued the following ominous prediction: “our age of globalisation could collapse just as our grandparents’ did.” As Ferguson foresaw, the world failed to respond to his warning, but would continue to enjoy the “irrational exuberance” of the time, because no one could predict when the day of the vessel’s sinking would arrive. It would finally dawn on September 14, 2008: When America’s fourth-largest investment bank, Lehman Brothers, declared bankruptcy, the climax of the current round of globalisation came to a grinding halt.
Ferguson’s ability to foresee the non-sustainability of the latest round of globalization lay in his awareness that several of its major outcomes were exactly like those of the previous round: a hegemonic state running excessive deficits, big power confrontations and unstable alliances, anti-capitalist terrorist organizations and the emergence of state sponsors of terrorism. History, of course, never simply repeats. Ferguson also noted differences between this round of globalization and the last; at the end of the previous round of globalization, capitalist powers, particularly the British Empire, were creditors to the world, while this time, ironically, some poor countries had become creditors to the developed capitalist countries. In particular China had become the biggest creditors to the US.
An article Ferguson co-authored in 2007 offers an explanation of this phenomenon.  It argued that the real reason that global asset markets had shown unusual prosperity between 2003 and 2007, resulting in global asset prices skyrocketing, was not, as some scholars claim, excessive liquidity and shortage of assets, but the commitment to global trade of vast amounts of cheap labor, mainly by China. This greatly improved the rate of return of global capital, at the same time, through bulk purchase of US bonds, China’s excess savings restricted American and global capital costs. The article also stressed that China’s excess savings came not from its citizens’ frugality, but from the huge profits that its undervalued exchange rate handed to large companies.
Of the two reasons Ferguson cites, the first is easier to understand: a great increase in the supply of low-cost labor increasing the returns on capital. The second reason is harder to understand: despite returns on capital increasing, costs decreased. The key, as the article shows, was that China’s domestic savings for the most part did not pursue high-yielding investments, but instead purchased large amounts of low-yielding US government bonds, directly suppressing America and the world’s interest rates. The article points out that such flows of funds, difficult to explain in profit motive terms, generally don’t take place between sovereign states. The article hence coins a new word, “Chimerica,” to portray the evolution of the Chinese and American economies into a conjoined monster. Put plainly, had the Chinese government not handed money over to the Americans, the price of capital would not have been so low, nor the asset price bubble so great.
Why China committed the folly of handing over its resources to others is what the world really fails to understand. Lurking behind the answer to this question is the serious challenge China poses for the stability of the US and the world at large.
The labor that mainly powered China’s launch into world trade was its so-called “rural migrant workers.” Who are they? They are state serfs emancipated from collective agriculture. The Chinese regime found that by making large numbers of migrant workers available for exploitation by foreign capital allowed it to kill two birds with one stone: as well as evading the difficulties of reforming the state-owned economy and the urban-rural dual structure, it increased opportunities for bureaucratic capital. This was why the Chinese authorities, exchange rate distortions notwithstanding, had no qualms about exporting capital to buy US treasury bonds and maintain the highly export-dependent economic growth. Unforeseen by the authorities, however, was that this strategy would increase the American and world economic imbalance, and bring on the collapse of this round of globalisation.
Having lost a large number of jobs in the export manufacturing sector, China has been forced to make significant adjustments, relying on domestic demand to promote economic growth. In order to achieve this, comprehensive political and social reforms need to be implemented. The profundity of the reforms China will soon be forced to make, are no less than in emancipation of the slaves in the United States, and on an unprecedented scale. The problem is that China’s rulers have grown used to freeriding on the Western economy, have laid no plans for reforming China, and moreover lack determination and leadership skills. During Obama’s term of office, therefore, China will be charged with uncertainty. Anything—from social upheaval, political coup, extremists coming to power, not to mention clouds of war once more gathering over the Taiwan Strait—may happen.
Equally worrying is that, due to China channeling huge amounts of resources to the United States over the years, there is an elite group of American businessmen, politicians and scholars who, like China’s power elite, have derived great benefit from China’s distorted economic development. Consciously or unconsciously beneficiaries of China’s policy of “preferring to endow friendly nations, rather than give to household slaves,” they are insufficiently aware of China’s fragility. Facing global financial turmoil, the common interest of the American elite and China’s ruling elite, is to postpone the outbreak of the crisis in China as much as possible. Beneficial as doing this would be for Obama’s concentration on dealing with other challenges, failing to do so could well make China the biggest challenge he faces.
* 梁京：奥巴马面临的中国挑战 19 January， 2009
 Niall Ferguson, “Sinking Globalisation,” Foreign Affairs, 20 January 2009.
 Niall Ferguson and Moritz Schularick, “‘Chimerica’ and the Global Asset Market Boom,” International Finance, 10:3, 2007: pp. 215-239