James P. Freeman: Aided by the U.S., China's hybrid economy looks to continue to surge

As Americans escaped for burgers, barkers and beer over  the Fourth of July, they were not only celebrating the nation’s independence. Some well-informed ones might  also have been celebrating that the trade war with China had not arrived in their backyards before the fireworks finale. Surely, they are mindful that 99 percent of the fireworks they set off came directly from China.

Maybe President  Trump didn’t get the memo that imports of fireworks dwarfed exports by a ratio of more than 40 to 1. As NPR amusingly noted, this “exploding trade deficit” has not prompted the kind of protectionist crackdown that the president has directed at other industries. At least not yet.

As Trump lights his own bottle rocket of tariffs targeted at China (so far, 25 percent on $50 billion out of $636 billion in total exchange of goods), with threats he may use heavier artillery -- and with China countering, dollar for dollar -- it is particularly timely to revisit a recurring but relevant question: Can China’s economy continue to flourish moving forward with the hybrid (capitalistic/highly controlled) model that the government has implemented?

The answer is a resounding Yes!

Last March, Yukon Huang, senior fellow at the Carnegie Endowment, wrote in The New York Times that “China has never been a normal economy.” He believes that unbalanced growth is a sign of successful industrialization; surging debt is a marker of financial deepening, rather than profligate spending; and, perhaps surprisingly, corruption has spurred, not stalled growth. Future success, he allows, hinges “on whether the Chinese government can strike the right balance between state intervention and market forces.”  Huang also says China’s remarkable progress can be credited in part to its leaders’ willingness “to set aside communism for pragmatism.”

Cary Huang, writing for the South China Morning Post last fall, as the centennial of Lenin’s Russian Revolution quietly passed, says that China is now more a “Leninist capitalist state” than a “Marxist socialist one.” Even as China is among the most exploitative nations in the world, (income and wealth inequalities, lack of political and other freedoms), “it is all the more ridiculous to call an economy, the world’s second-largest, ‘socialist’ when 70 percent of it is privately owned, when it hosts the world’s largest army of billionaires, or when it grapples with issues such as a debt crisis, stock market woes and a real estate bubble,” argues Huang.

The creation and embrace of this hybrid capitalism -- state capitalism -- is not entirely new. However, China has fostered (and to a lesser extent Malaysia and Russia also have) the rise of what The Economist called in 2012 a new kind of “hybrid corporation.” It behaves like a private-sector multinational but is backed by the state.

These new economic and corporate alloys of conventional capitalism might confound certain world leaders (and perhaps distract the one with Twitter Tourette’s syndrome) but China’s leaders intend to continue policies that have reaped rewards.

As Americans look to the next quarter, the Chinese look to the next quarter century.

Earlier this year, China’s Communist party cleared the way for President Xi Jinping to rule for life. He has been president since 2012 but the move is seen as a means to consolidate his power and continue his successful policies (not to mention his predecessors'). Richard McGregor, senior fellow at the Lowry Institute, told The Financial Times this past February, “I don’t see any indication of a faster pace of what Westerners see as economic reforms and what Chinese see as tinkering with their hybrid economic model.”

China was the world’s largest economy  until it was displaced by Great Britain as the Industrial Revolution swept through Europe. China (aka the Middle Kingdom) then fell behind -- remaining agrarian and poor. But since economic reforms were implemented in 1978, China has roared backed. From that period until 2014, its annual GDP growth averaged 10 percent; now it’s closer to 6.8 percent (U.S. first-quarter annualized GDP growth was calculated at 2.2 percent). China has raised per capita GDP almost 49-fold, from 155 current U.S. oollars (in 1978) to 7,590 U.S. dollars (in 2014), lifting 800 million people out of poverty.

It is expected that in 10 to 20 years this demographic will become a massive middle class.

As China shifts emphasis from heavy industry toward health care, technology, education and entertainment to accommodate a consumer-oriented economy, (and self-reliance) it already is the world’s largest exporter, according to weforum.com.  17 percent of its goods and services head to the U.S., 15.9 percent to the European Union, 15.5 percent to Hong Kong and 6.4 percent to Japan. (As President Trump further agitates trade with North American, Asian and European allies, China will absolutely exploit such frictions.) China is expected to become the world’s largest economy once again by 2030.

With President Trump considering a military Space Force, the Chinese are wisely filling space on earth. In 2013 China launched the Belt and Road Initiative. Having underwritten $900 billion in loans already, China aims to modernize the infrastructure of the ancient Silk Road, linking Europe and Eurasia. With 71 countries participating -- from Poland to Pakistan -- it also promises to revive ex-Soviet states, according The Economist. And strategically important Turkey, where over 1,000 Chinese firms operate.

But America still factors into China’s long-term prosperity.  As long as America runs large debts (everything suggests that it will continue) China prospers. It owns $1.19 trillion, or nearly 20 percent, of U.S. debt held by foreign countries. Kimberly Amadeo wrote this past May in thebalance.com that this helps China’s growth by keeping its currency weaker than the dollar. This also keeps its products (hence exports) cheaper than U.S. goods. 

As America’s largest foreign creditor, China is able to exert more political and economic influence over America as it unwittingly finances China’s grand hybrid experimentations.

James P. Freeman, a former banker, is a New England-based writer. He is a former columnist with The Cape Cod Times and The New Boston Post.