Will The Chinese Economic Model Consign The American One To History’s Dustbin?

November 15, 2008

By Martin McCauley: China has long worshipped the American model of economic development. It viewed the United States as the premier nation in the world in terms of its economic might.

But the times of unreserved admiration are gone now. Doubts are now being entertained by the Communist Party of China (CPC) leadership about the correct path to take to economic supremacy. The world financial meltdown has shaken basic assumptions about the American capitalist model. Fundamental to this model is the belief that political freedoms should accompany economic reform. There are universal values such as democracy, the rule of law and human rights that are deemed to be necessary components of a modern economy.

Chinese President Hu Jintao, speaking at the Europe Asia Conference in Beijing recently, has made it clear that the best contribution that China can make to stabilising the global financial system is to put its own house in order. He said that the most important thing was for China to manage its own affairs well.

Does this mean that China will cease buying American bonds and investing in the US? Last month, a Chinese banker stated that US bonds were still a major instrument of Chinese investment. So far this year the People’s Bank of China and other central agencies have purchased $600 million worth of US Treasury bonds and $360 million worth of bonds issued by Fannie May and Freddie Mac. Several hundred million dollars have been spent on securities issued by other American companies. How long will this last? Altogether China has invested about $1 trillion in US Treasury bills.

Some bankers and journalists have doubted the wisdom of China investing so much in US securities. Their argument is that these assets are depreciating fast and there is no way of judging their long-term value. The opinion has even surfaced that it would be disastrous for China to try to save the US financial system. ‘It would amount to throwing good money after bad,’ was one comment.

In Moscow last week Prime Minister Wen Jiabao – regarded by many as a liberal in economic affairs – talked of a ‘new world order’ and the need to fashion new institutions. They were needed to regulate more tightly financial institutions in those countries whose currencies are kept as reserves by many states. A more diverse currency system is needed. Wen made no secret of the fact that China has objected strongly to American hegemony in the world financial system.

The CPC has been quick to underline to its cadres the superiority of the Chinese model. Foreign banks should learn from Chinese banks, which are much more conservative in their lending. One senior banker was quoted as saying that China had to overcome its superstitious belief in the superiority of foreign banks and financial markets.

Extensive coverage in Chinese newspapers has been devoted to the rescue packages adopted by the US and other Western states to shore up their banks and financial institutions. ‘This is a socialist model of development’, crowed one newspaper. Karl Marx’s Das Kapital had once again become popular reading in the West. As someone, who has attempted to plough through all three volumes of Das Kapital, I would say that they make dense reading. The problem is that they are about the weaknesses of capitalism. The only solution to the travails of capitalism, Marx wrote, is to abolish it.

What, according to Marx, should be put in its place? A socialist system, of course. However, Marx does not spell out how this panacea can be achieved. The problem for the CPC is that China ditched Marxism-Maoism in 1978 when Deng Xiaoping launched his economic reforms. Still, the more conservative cadres are delighted with the present turn of events in the capitalist world. It promises to make them relevant once again.

How naive they are! They are wasted goods, and they’d better understand that.

CPC cadres are now obliged to read and take to heart an article entitled ‘The Chinese system is incomparably superior’. This is part of a nationwide campaign to digest President Hu Jintao’s ‘scientific theory of development’. One has to confess that Hu’s goal of development and social stability proceeding in tandem is more appealing than unbridled capitalism, which produces inequality. The advantage for the CPC leadership is that whatever it proposes would be called ‘scientific’.

All this means that gradual reforms towards democracy become less appealing. Conservative cadres have lambasted the concept of universal values, arguing that they are ‘sugar-coated bullets’ aimed at gradually transforming China into a capitalist country. The wind is now in their sails. But for how long?

China is now entering a phase in which it will have to reconsider its strategy of development. The American model has failed and will be replaced by a more clearly defined new model. What this model will be remains to be seen.

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