Great expectations: (Competing) domestic drivers of Chinese policy deliberations

Shaun Breslin 16 April 2010

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Although China is a one-party state, this does not mean that China's leaders are free to do whatever they want. To be sure, compared to other countries, the level of organisation and control from the top is indeed very strong; and China's leaders do not exactly shy away from presenting themselves as being “in control”. Moreover, the way in which those leaders responded to the global economic crisis by mobilising resources to boost domestic sources of growth as exports fell was remarkable (and for many, impressive) - when the final score of who gained and who lost in the global crisis is tallied, China will probably be near or at the top. But despite being stronger than most, we should not imbue the Chinese leadership with total power, authority, and capacity. Even in a state as strong as this, state power has clear limitations – and crucially is much more limited than some of the official words of Chinese government seem designed to have us believe. There is more to politics and policy than the preference of key individuals. China is becoming an increasingly diverse and complicated society with different interests resulting in different demands being articulated and/or anticipated by policymakers.

Maintaining support for exchange-rate policy

Currency control is a good example. The vast majority of China's exports are produced in just eight coastal provinces, and not surprisingly, it is from within these provinces that we have seen the strongest pressure to maintain employment by supporting exporters. So when the central leadership decided to deter low cost and low value-added exports by fully implementing labour laws, removing tax breaks and allowing the renminbi to appreciate,1 the impact was felt most clearly in the coastal provinces. Put bluntly, the policy worked – but not everybody liked it. By the summer of 2008, low value-added processing exporters were laying off workers and closing down factories and it is notable that China’s top leaders all visited the coastal provinces with the greatest concentration of export industries over that summer - Hu Jintao went to Shandong, while Wen Jiabao and other central leaders visited Guangdong, Zhejiang, Jiangsu and Shanghai.

The result was that, just over a year after cutting tax rebates and after a series of meetings of top officials in Beijing, the policy was partially reversed and some rebates restored in July 2008. The leadership also cut back on currency appreciation, and adjusted other policies in an attempt to restore some of the support for exporters that had previously been withdrawn (Naughton 2008).

The difficulty of moving on

The way in which the Chinese economy has (partially) engaged the global economy has by most accounts been incredibility successful. But the growth has established patterns of economic and political relationships that make it difficult (though not impossible) to move on. Immediately, this statement needs to be qualified. Things can change and indeed are changing. But the importance of maintaining employment combined with the powerful economic and political interests in coastal China that have benefited from locating China as the workshop of the world has resulted in strong incentives to resist attempts to promote a new pattern of global engagement.

Or put another way, promoting new patterns is all well and good; it’s getting rid of the old patterns that generates problems. Employment in China's export industries only accounts for around 5% to 6% of all employment, leading some very well informed analysts to question if a renminbi appreciation could really do much harm to the overall employment situation (see Goldstein and Lardy 2007). But the Chinese response is that this still equates to over 40 million actual jobs, and that China needs up to 15 million new jobs every year just to absorb new entrants into the workforce (see for example Chen and Wheatley 2010). And we shouldn't forget that there are profits to made – nor should we forget that many of those who are making (or want to make profits) from exports have close relations with local party and state officials (Dickson 2007).

Unwritten contracts

The maintenance of Chinese Communist Party rule in China is built on a sort of unwritten social contract between the leaders and the people. As long as the people accept one party rule and do not challenge the system,2 then one party rule will provide stability and growth and defend China's national interests in an often hostile global order. The global crisis and RMB policy are related to all three. With margins already low for many exporters, a loss of competitiveness through currency changes might bring not only a threat to growth, but also instability through increased unemployment and a reduction in the money sent back to the countryside where poverty still remains a fact of life for millions of Chinese. More importantly for this discussion, it also has resonance in Chinese nationalist communities.

Despite the apparent success of joining the global economy, there remains considerable debate within China over the logic of where to go now (or even if things have gone too far). There are also practical (if not outright ideational differences) within the top leadership itself over the efficacy of liberalisation. These critical voices tend to use the language of national power and security, focusing on the extent to which China has become “dependent” on external actors, and/or vulnerable to the unplanned vagaries of economic shocks and the more sinister US dominance of the global economy. International economic relations are thus often seen as a subset of more traditional international relations that can build, or weaken “comprehensive national power”.3 And this is not just an elite endeavour. As many have predicted, the expansion of the internet has created a space in China for the articulation of popular interests. But contrary to the expectations of some – perhaps more correctly, hopes – this space has not been filled by voices calling for political liberalisation and democracy. Rather, research suggests that the articulation of what we might call “nationalist voices” has tended to dominate. Indeed, while the leadership has been criticised by the public through discussion forums and bulletin boards, such criticism can take the form of complaining that leaders aren't forceful enough when it comes to promoting and defending China's interests (Shen and Beslin 2010). The leadership has in some ways created and legitimated a nationalist sentiment that it is occasionally difficult to control.

Playing high politics

The benefits and drawbacks of currency appreciation (and depreciation) are highly technical and highly contested. This complexity is reflected in the debates among economists within China and the range of different policy positions that these debates generate; including those that point to the long-term benefits of currency reform. But as with many issues in China, when complicated technical issues become part of nationalist discourses, they move out of the realm of specialist discussion and consideration and into the realm of “high politics”. They also become subject to increased popular scrutiny and comment where technical specialist knowledge becomes subordinate to considerations of the national interest – and perceived challenges to the national interest.

Alistair Johnston (2008) argues that there is a strong and deliberately constructed link between the Chinese state, China’s leaders and the Chinese people. So what foreign governments, journalists, NGOs and individuals might think is simply a criticism of a specific policy can be perceived as a criticism of “China” as a whole. Thus, for example, when US journalists claimed that their negative remarks about Chinese actions in Tibet were aimed at the government and not the Chinese people, this was simply dismissed as sophistry in China; indeed, one Chinese analyst argued that the attempt at “separating Chinese government and people is so naive that deserves to be boycotted” (Pan Yaling cited in Shen and Breslin 2010).

Offending the people

This association of people, leaders and state is manifest in official Foreign Ministry statements that point to how the actions of others have hurt the feelings of the Chinese people. One Chinese blogger went back through the archives of the People’s Daily online and discovered that the Chinese people’s feelings had been hurt a total of 115 times between 1946 and 2006 by 15 countries, the Vatican City, the EU, NATO and the Nobel Prize Committee (Kecheng 2008 cited in Martinsen 2008). The single most offending country was (perhaps not surprisingly) Japan with 47 cases followed (again not surprisingly) by the US with 23. These slights have included criticisms of China’s paramount leaders – Albanian attacks on Mao Zedong and Japanese foreign ministry’s criticism of Deng Xiaoping. But the overwhelming majority of the rest involve foreigners interfering in some way with matters pertaining to Chinese sovereignty.

Crucially, while this can be actual harm as in the bombing of the Chinese embassy in Belgrade, it is more often a psychological harm caused by outsiders interfering with issues that are wholly domestic in nature and therefore not legitimate areas for external comment. And this is where external criticism of Chinese currency policy is transformed from a technical issue for specialists to debate into a national discussion. In short, for many in China, it is essentially about sovereignty – being able to do what is best for the country and not being dictated to by the West. Currency reform might well be the best thing – but it should emerge because China decides that it is in its best interests to reform, and not because of external pressure for change.

Moreover, not least because of the global financial crisis, there is an increasing confidence in China that its own developmental experience has not only proved to be the best thing for China, but might also provide lessons for others to learn from. The idea of a “China model”– what it might actually be and how it might be applied in other settings – is being widely debated in China.4 And this new self-confidence in the viability and durability of the Chinese alternative to the Western neoliberal “Washington Consensus” strengthens the resolve of those who want to resist outside pressure to liberalise China's currency regime.

How might China react to sanctions?

So China's policymakers face a number of dilemmas with different domestic interests and dynamics pulling in different directions. Being seen to “give in” to foreign pressure would damage the leadership's nationalist credentials, and currency controls make it easier for thousands of Chinese enterprises to make profits. But notwithstanding the desire to shift the balance of growth more towards domestic demand, exports will continue to be important and access to the global economy remains crucial for future growth prospects. And here it is not just any specific trade sanctions that might damage these prospects, but also the impact on perceptions of China as a “responsible” economic partner – an image that those responsible for promoting China's international economic relations have been so keen to cultivate.

So given the different demands on China's policy makers, what might this mean in terms of the options available to the Chinese government and how might they react should some form of sanctions be imposed? It is important to note that while much of the debate over Chinese currency policy is framed in terms of China's response to the downturn in global demand, as noted at the start of this chapter, the decision to restore various forms of support for exporters actually preceded the full blown outbreak of the global financial crisis. To be sure, global recovery and an increase in demand in key markets might make it easier for exporters to accept renminbi appreciation. But even under “normal” trading conditions, we can expect exporters (and their political representatives) in low cost industries to continue to press the government for help to survive and maintain employment.

Such support does not have to take the form of currency controls. There are a range of other devises available for deployment by national and local governments to either support exporters, or to keep foreign actors out of the Chinese economy (or both). For example, local companies can negotiate tax deals that are typically not available to foreign companies, and gain preferential access to investment through government directed bank lending. A distinct lack of transparency in the dissemination of information can also privilege favoured domestic actors in addition to the more blunt approach of simply telling local companies to buy local instead of international. And while WTO entry formally opened many sectors to foreign companies, this opening was often conditional, and subject to numerous regulatory conditions and clauses (see Beslin 2006 for details). This regulatory environment (and its opacity) means that foreign companies can be frustrated in their attempts to access the Chinese market and it seems reasonable to expect that these tools might be put to use to protect and penalise should any action be taken against China. Indeed, there is anecdotal evidence to suggest that such measures are already being used to privilege domestic producers and restrict the opportunities for foreigners with both the US and EU Chambers of Commerce in China reporting worsening “market” conditions (see for example Wuttke 2010). Given that online activists called for a boycott of French goods and companies after the Olympic Torch relay was attacked in Paris, it is likely that a similar campaign would follow any US led action on China's currency policy as well.

Of course, China is not the only country where a sense of national indignation has an impact on policymakers; the same could be said about the pressure on the US government to do something about China's currency policy. Moreover, doing nothing is not a very palatable option and is seen by many observers to empower China. What this suggests, then, is that pressuring China's leaders to liberalise might actually end up restraining their ability to do so. Outside pressure – particularly when it comes in the shape of the US government – “nationalises” technical issues and brings them to the forefront of popular attention. It also gives succour to those who oppose further (indeed, even existing) liberalisation and favour a more national-based Chinese economic future. As already noted, the need to “rebalance” the economy to rely more on domestic consumption and demand as opposed to investment and exports is widely accepted in China. What is open to question is how far a newly expanded domestic market will be “open” to foreigners. For those who are concerned that Chinese policy gives Chinese produces an unfair advantage – both in terms of exporting overseas and in serving the domestic Chinese economy – pressing for more liberalisation might ironically result in the total opposite through a hardening of Chinese attitudes and policies.

References

Breslin, S. (2006) “Foreign Direct Investment in the People’s Republic of China: Preferences, Policies and Performance”, Policy and Society, 25 (1): 9-38.

Breslin, S. and S. Shen (2010) “Online Chinese nationalism(s): Comparisons and Findings” in Simon Shen and Shaun Breslin (eds) Online Chinese Nationalism and Chinese Bilateral Relations, Lanham: Rowman and Littlefield: pp: 263-282.

Chen, E. and A. Wheatley (2010) “Yuan rise would be disastrous: China export body”, Reuters, 18 March

Dickson, B. (2007) “Integrating Wealth and Power in China: The Communist Party's Embrace of the Private Sector”, The China Quarterly, No. 192, pp. 827-854.

Goldstein, M. and N. Lardy (2007) China’s Exchange Rate Policy: An Overview of Some Key Issues, Peterson Institute for International Economics

Johnston, A. (2008) Social States: China in International Institutions, 1980-2000,Princeton and Oxford: Princeton University Press.

Kecheng, F. (2008) “Do Not Hurt Me Again”, 9 December.

Martinsen, J. (2008), “Mapping the hurt feelings of the Chinese people”, 11 December.

Naughton, B. (2008) “A New Team Faces Unprecedented Economic Challenges”, China Leadership Monitor 26.

Ramo J. C. (2004) The Beijing Consensus: Notes on the New Physics of Chinese Power, London: Foreign Policy Centre.

Shen, S. and S. Breslin (eds) (2010) Online Chinese Nationalism and Chinese Bilateral Relations, Lanham: Rowman and Littlefield.

Wuttke, J. (2010) “China is beginning to frustrate foreign business”, The Financial Times, 7th April.


1 The RMB appreciated by about 20 per cent % in the three years from the removal of the currency peg in July 2005.

2 For those that are deemed to be providing a challenge to party rule, then the full force of the state can be deployed against them.

3 Comprehensive National Power or zonghe guoli is an attempt to create a quantifiable assessment of relative strength by combining a whole range of indices that includes military force but also economic development including societal conditions, global influence, natural endowments and so on. Associated with new thinking under Deng Xiaoping in the 1980s, the term is used here to indicate how economic relations are thought of as comprising one part of a greater whole centering on conceptions of national strength and security.

4 The idea of the Beijing Consensus was populartised in China by Joshua Cooper Ramo (2004) The Beijing Consensus: Notes on the New Physics of Chinese Power (London: Foreign Policy Centre). However, most of the contemporary debates are framed in terms of a china model rather than consensus..

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Topics:  Exchange rates International trade

Tags:  global imbalances, China, exchange rate policy

Professor of Politics and International Studies, University of Warwick

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