Trouble in China

by Benjamin Studebaker

There’s a lot of fear in the United States and elsewhere with regard to a rising China. Many people are worried about the amount of government debt China possesses, or how so many jobs in industry and manufacturing have moved over there. Increasingly, China and the United States are being compared to one another as if their power outlay were more or less equal–in Pakistan for instance, the numbers are more or less even on the question. However, there are several key reasons why Sinophobia is exaggerated and unnecessary, and they comprise today’s topic.

There are several arguments I’d like to make in this post with regard to China:

  • Debt: Chinese holdings of US debt are lower than most people understand
  • Defence: China’s military is substantially weaker than that of the USA
  • Industry: the Chinese industrial model is not sustainable as constructed

First off, debt.

It is considered common knowledge that China holds a large portion of US debt, so much so, in fact, that the United States is dependent upon China to borrow money. This is straight-up factually inaccurate. If you go dive-bombing through the Federal Reserve figures, what you will find is that only about 8% of US debt is currently owned by China. The percentages go up and down by a few points here and there depending upon precisely how recent the data set is picked from, but it looks something like this:

Why is it that so many people think that China owns a far larger portion of the debt? Usually the people making those claims are looking at this data, which only examines the percentage of debt held by foreign countries:

It is often assumed by people looking at the percentages of debt owed to various countries that most US government debt is owed outside the country; in reality, most US government debt is owed to Americans–either to private citizens or other parts of the government (the Federal Reserve, the Social Security trust fund, pension funds, etc). It is completely unnecessary for the United States to ensure that China continues to buy its bonds. This means that China has no essential economic leverage or power over the United States. Goods are made in China not because China threatens to stop buying our bonds, but because Chinese workers are willing to work for less. Most of China’s remaining influence over the USA is derived from the fact that China is a nuclear power and consequently cannot be ignored, and from the fact that American consumers are used to buying goods cheaply as a result of their production in China.

Next up, defence.

The media often highlights increases in Chinese defence spending. The Economist put out this chart, predicting frighteningly high levels of Chinese military power in the coming decades:

However, this prediction makes some pretty glaring assumptions, most notably, that China will attain a GDP higher than that of the United States such that it can run a higher absolute level of defence spending despite spending a smaller percentage of its available funds on defence. It is a bold prediction, considering that The Economist also has data showing the current spending gap:

China remains very, very far behind. This translates not only into a military that, while full of foot soldiers, is short on heavy armaments, but also one whose weapons are inevitably technologically behind that of the United States. We can see evidence of this gap, again, with the help of The Economist:

China’s infantry-heavy, technologically backward military simply cannot stand up to the modern military machine of the United States. That said, the trend figures are for China to get more powerful economically and as a result militarily. However, there are strong reasons for scepticism on this point.

And so we are brought to industry.

China’s economy is actually far more dependent on the West than is conventionally understood. The first thing to notice about China is that its economic growth has not produced domestic, homegrown industry that competes on the international market. For example, if you were asked to come up with five Japanese companies that successfully export to the United States, you could easily name Honda, Toyota, Mitsubishi, Nintendo, Sony, and many others. You could easily name several South Korean ones as well–Samsung, Kia, LG, Hyundai, and so on. However, I bet you would be hard pressed to name a single native Chinese company that exports to the west. This is because there simply are none. Foreign companies create the jobs in China, foreign companies order parts and materials from China. China’s economy prospers because foreign companies want to operate there to take advantage of lax regulations and low wages. However, those lax regulations and low wages are not sustainable–as China’s economy develops, Chinese workers grow to have higher expectations. There is labour unrest in China, and not merely over the size of the wages, but over the number of hours of work expected, and over the working conditions. A western style labour movement is slowly growing up in China, and it will do the very same things that the labour movement did historically in western countries–it will raise the cost of production. In western nations, this happened prior to globalisation, when the technology and logistics of going abroad to take advantage of cheap wages simply did not exist. Western companies were forced by the labour movement to raise wages, improve conditions, and shorten hours. In China’s case, however, there are a myriad of other countries with poorer workforces who would be happy to work in conditions and for wages that Chinese workers just will no longer tolerate.

Japan and South Korea both initially industrialised as China is doing, manufacturing products at wages other countries would not put up with. These countries, critically, developed competitive, successful native industry and high tech workforces. China has not made those moves, and as a result China’s growth is far more precarious and fragile. To assume that China will continue to grow more or less continuously is silly. The unsustainable nature of China’s growth virtually guarantees at some point, a crisis of labour, an exodus of foreign companies, and a large scale depression, barring the spontaneous development of native industry. Unfortunately for China, high tech native industry requires a philosophical climate open to new ideas and innovation–with China’s continued unwillingness to promote creativity and the dissent and disagreement that goes with it, it is unlikely that China will become a bigger, larger, more militarised Japan any time soon.

In the meantime, all the west would need to do to put the brakes on rising China would be to quit buying products made there. China’s population remains too poor to create the domestic demand needed to sustain its supply. It remains reliant on western consumption and on western companies willing to source their supplies there. The danger and instability in this scenario is not with the United States, a country possessing many willing purchasers of its debt, a powerful military, and a myriad of successful and dominant multi-national corporations, but with China, a country that finds itself totally economically dependent on the west for its growth and development, and for whom utter economic annihilation is just a tariff or wage hike away.


There’s been more labour unrest in China since this was originally posted.