INTERNATIONAL RELATIONS

309© Th e Editor(s) (if applicable) and Th e Author(s) 2016 A. Cafruny et al. (eds.), Th e Palgrave Handbook of Critical International Political Economy, DOI 10.1057/978-1-137-50018-2_16

16

Critical IPE and the Rise of China

Few developments in the global political economy of the 21st century have received so much scholarly attention as the “rise of China”. Although occu- pying only a small and relatively obscure niche in this wide-ranging litera- ture, there have also been important contributions to studying the political economy of China’s recent development from the critical perspective identi- fi ed by the editors in the introduction to this volume. Th ere is however no widely recognized common core: the fi eld is very young and only beginning to recognize let alone overcome certain key obstacles. First, there is the bifur- cation—not absolute, but quite meaningful nevertheless—between the “old China hands” in the fi eld, the China specialists trained and well versed in the history, language and culture of China and the wider region, on the one hand, and those (like the author of this chapter) whose scholarly interest in China has only emerged later and remained secondary to their engagement with broader themes in international political economy (IPE) thus depending on the literature available in English and other Western languages. Th en, contri- butions to the fi eld by Chinese scholars themselves are few in number. Th ere is also relatively little communication between critical scholars within China and those based outside China. Critical Chinese scholars being published in English still form a rare species, with a few important exceptions such as

Globalizing China: A Critical Political Economy Perspective on China’s Rise

Henk   Overbeek

H. Overbeek (�) Vrije Universiteit Amsterdam , Amsterdam , Netherlands

Wang Hui 1 (Wang 2009 , 2014 ). In spite of all this, critical IPE scholars have made key contributions to our understanding of the dynamics and contra- dictions of China’s rise in the contemporary global political economy. Th is chapter aims to survey some of these quite disparate contributions (without any claim to comprehensiveness) and to put them into the context of a more or less coherent conceptual framework.

To this end, there are a few interrelated theoretical considerations to take into account beyond the fundamental characteristics of critical IPE outlined in the introductory chapter in this volume (rejecting the objectivism, status quo bias and value neutrality of mainstream approaches). Th e fi rst is the need for an historical approach; another is the need for a holistic approach, the last one is the rejection of a state-centric discourse. 2

Th e critique of political economy, going back to Marx, starts with a critique of the ahistorical premises of liberal theory which assumes that the capitalist order is somehow the natural order which will last into eternity. It isn’t and it won’t. All social structures are historical , i.e. they have a beginning and an end, they are not manifestations of an eternal natural (or divine) order, but they are man-made and fi nite. Th is insight invites us to study the conditions of their emergence as well as the forces that will determine when and how such historical structures will cease to exist.

Second, the capitalist order is global : the globalizing tendency of capital has been inherent to it from its birth, and practically all parts of the globe were integrated into this order by the end of the 19th century. Globality does not however mean uniformity: the capitalist order is characterized by the dialectics of combined and uneven development. Concretely this implies that the study of any part of the global system (such as China) must necessarily situate that part in the context of the global system, must analyse its development as it is articulated with that of the system as a whole: seemingly similar “national” developments can mean diff erent things at diff erent moments in “system time”.

Finally, a critical approach to IPE must transcend the state-centrism inherent in most mainstream literature. Th e world is made up of state-society complexes . Th e state must not be reifi ed but must be understood for what it is: an ensemble of institutions and practices that reproduces the existing social

1 In this contribution I will, when quoting Chinese names, follow the practice of putting the family name fi rst, the given name or names last. 2 In the interest of readability I will dispense here with giving too many literature references. As will be readily apparent, my approach is heavily indebted to the work of Robert Cox ( 1981 , 1983 , 1987 ), Kees van der Pijl ( 1984 , 1998 ), and Immanuel Wallerstein ( 1974 ); further key references can be found in some of my earlier writings (see Overbeek 2004 , 2013 ).

310 H. Overbeek

order and manages its evolution, and as such is an expression of the balance of power between diff erent social forces, classes and class fractions.

Globalization and the Decline of China

Globalization Re-Visited

Globalization is a much abused term, defi ned in very diff erent ways. However, from a critical IPE perspective, the term “globalization” essentially refers to phases in the history of the capitalist world economy of accelerated expansion and intensifi cation of capital accumulation. Expansion refers to the spatial spread of capitalist relations—incorporation of hitherto external regions into the global circuits of capital and the geographical spread of capitalist relations of production; intensifi cation refers to the process of deepening marketization and commodifi cation in capitalist economies by which new spheres of human existence are subjected to the pursuit of private profi t and the discipline of market relations. Ultimately, this process is driven by capital’s ceaseless search for cheap sources of raw materials and labour, for new markets, for diff erential profi t rates, for an escape from the internal contradictions of the capital— wage labour relation. Technological changes facilitate rather than cause the intensifi cation of this process; they are often indeed themselves the product of these contradictions.

Capitalism is not new to the world. Some have argued that the global economy, trade, commercial enterprise, and even capital accumulation, have an uninterrupted history of at least fi ve thousand years (e.g. Frank and Gills 1993 ; Frank 1998 ). More familiar is the claim that the start of the epoch of generalized commodity production can be traced back to the crisis of feudalism in Europe and the creation of the capitalist world market after the so-called discovery of the Americas at the end of the 15th century (e.g. Wallerstein 1974 ). Th ese positions are not mutually exclusive. If we trace the basic structures of the contemporary world-economy back to their origins, we arrive in what Wallerstein has called the long 16th century (roughly from mid-15th century to mid-17th century). What distinguishes the post-15th century world-economy from the preceding world economy is the emergence of capitalist relations of production in the emerging core areas, and an inter- national division of labour which came to concern the trade in essentials (such as timber, grain, etc.) rather than the trade in luxury products (silk, porcelain, spices) characteristic of earlier ages and of the trade between centres of eco- nomic power remaining essentially external to each other (Wallerstein 1993 ).

16 Globalizing China: A Critical Political Economy Perspective... 311

Th e subsequent expansion of the European world-economy was an uneven process characterized by periods of rapid intensifi cation alternated by periods of consolidation and even reversal, wrought with contradictions. In the past fi ve hundred years we can identify three episodes of intensifi ed market expansion and deepening commodifi cation, namely the episode of the original creation of the world market which we will call the period of mercantile globalization or in the words of Wallerstein the long 16th century (1492–1648); the expansion of industrial capital and the rise of imperialism in the second half of the 19th century which we might call the era of laissez-faire globalization (1846–1914); and fi nally the present episode of neoliberal globalization characterized by the global expansion of transnational capital (1978–present) .3 Th e best way to look at these episodes is as distinct periods characterized by intensifi ed change in an historical process of much longer duration, namely the process of capi- talist development that has engulfed the globe since the 15th century.

The Closure of China in the Long 16th Century

India and China have long been the most advanced regions in the world, much more advanced than Europe. China was, culturally, technologically and economically the most advanced region in the world until the so-called Great Divergence. It was not until the 18th, possibly even the early 19th century that Europe charged ahead of China in terms of technological, economic and cultural development (Pomeranz 2000). In a much quoted passage, Adam Smith in 1776 identifi ed China as much richer than Europe (Frank 1998 , 13). Trade relations between China and Europe date back at least to the days of the Roman Empire, and China consistently ran a signifi cant trade surplus, which was settled by China’s trade partners with silver bullion (Frank 1998 , passim). In the 14th and 15th centuries China expanded its trade links beyond its tra- ditional land-based links to India and, via the Silk Road, to Central Asia, the Middle East and Europe, and its sea-borne relations in East and South East Asia. Naval expeditions ventured as far as India and East Africa. However, after the death of Admiral Zheng He in 1434, further expeditions were termi- nated (Frank 1998 , 108–109). As Wallerstein argues, it appears that it was the Mandarin bureaucracy rather than the Emperor that thwarted the continu- ation of naval expeditions. Ultimately this was due to the imperial political structure with its prebendal bureaucracy averse to commercial adventure.

3 Th e dates demarcating these episodes are chosen for their symbolic value: it goes without saying that in historical reality the transitions are much more fl uid and drawn-out than these specifi c dates would suggest.

312 H. Overbeek

… [T]o the extent that some groups in China might have found expansion rewarding, they were restrained by the fact that crucial decisions were central- ized in an imperial framework that had to concern itself fi rst and foremost with short-run maintenance of the political equilibrium in its world-system (Wallerstein 197, 63).

Th is is not to say that all commercial activity in China was halted. On the contrary, China maintained its existing regional trade links, which fl ourished anew after the transition from the Ming dynasty (1368–1644) to the Qing dynasty (1644–1912) had been completed, especially after 1682. China was the centre of a tribute-based world empire in its own right (Frank 1998 , 109– 116). Development of agriculture and industry, increasingly on a commercial basis, proceeded apace right up to the end of the 18th century. However, China remained external to the emerging European world-economy that was consolidated with the Peace of Westphalia in 1648. 4 Both aspects—the superior cultural and productive achievements of China as well as its posi- tion outside the European orbit—are beautifully refl ected in this well-known quotation:

In 1793 Emperor Ch’ien-lung (Qianlong) wrote King George III through the English ambassador to China the oft-quoted letter that “as your ambassador can see for himself, we possess all things. I set no value on objects strange or inge- nious, and we have no use for your country’s manufactures....Th ere was [is] therefore no need to import the manufactures of outside barbarians in exchange for our own produce” (Frank 1998 , 273).

China’s Peripheralization in the 19th and Early 20th Centuries

Th e decline of China started with its forced incorporation into the European world-economy around the turn of the century, and especially after the defeat of Napoleon’s imperial design in 1815. 5 Th e process began with the gradual replacement by Europeans of the Chinese traders in the China Sea

4 Until the early 19th century, Macao remained the only Western outpost in China, rented as a port in 1557 until it became a Portuguese colony in 1887. Hong Kong only became a British colony after the First Opium War in 1842. 5 A parallel story can be told of the fate of India, which after 1815 was turned from a superior producer of cotton textiles into a supplier of raw cotton to the textile mills in Lancashire (Frank 1998 ; Hersh 2010 ).

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(Frank 1998 , 274). Th e First Sino-British Opium War (1839–1842) and the ensuing “unequal treaties” sealed China’s fate for more than a century (Lin 2013 , 5). Th e Chinese were no longer able to withstand the pressure of Britain to allow the opium trade which resulted in a steady drain of silver. Although China was never formally colonized during the 19th century, for- eign powers—Britain, France, Germany, Russia, Japan and the USA—were able to carve out concessions in the most advanced coastal regions giving them preferential economic access and political, judicial and military con- trol. Th roughout the century following the Opium War China was plagued by social unrest and political dissatisfaction as manifest in the Taiping Rebellion (1850–1864), followed by similar rebellions in various parts of China. Defeats in the Second Opium War (1856–1860) and in the Sino- Japanese War (1894–1895) fought for the control over Korea eventually led to the Boxer Rising (1899–1901) which, although defeated, ushered in the rise of a modernizing nationalist movement which overthrew the empire in 1911 to establish Republican China.

When the Versailles Peace Treaty at the end of World War I transferred the German concession (Qingdao) to Japan rather than to the Republic, a new outburst of anti-imperialist struggle followed, the May 4th Movement. Th is movement led to the creation of both the nationalist Kuomintang (KMT) and the Chinese Communist Party (CCP) (Hersh 2010 , 38–41; Lin 2013, 1–6). Th e new Republic soon fell victim to warlordism, only sub- dued by Chiang Kai-shek in 1927. At that same time, the civil war between the KMT government and the CCP commenced. In 1931 Japanese forces invaded Manchuria, and in 1937 the Japanese proceeded to invade the rest of China. Between 1937 and 1945 both the KMT and the CCP, while also intermittently fi ghting each other, conducted a national liberation war against the Japanese. Full scale civil war resumed in 1945 following the defeat of the Japanese, until the CCP drove the KMT from the Chinese mainland to Taiwan, and proclaimed the People’s Republic of China (PRC) on 1 October 1949.

A century of civil war, foreign occupation and economic exploitation had taken its toll. China’s share of global Gross Domestic Product (GDP) fell from over 30% in 1820 to less than 10% in 1913, and less than 5% in 1950. Its per capita income in real terms fell by a quarter (Maddison 2006 ). Th e incorporation of China into the capitalist world-economy and its rapid peripheralization had reduced the once mighty empire to a state of utter despondence.

314 H. Overbeek

Strategic Withdrawal: Laying the Foundations for China’s Return (1949–1976)

Th e proclamation of the PRC marked the end of China’s decline. In one stroke, China withdrew from the capitalist world-economy and joined the Soviet-led socialist camp. During the fi rst Five-Year Plan it seemed as if China in some ways was trading in its dependence on Western capitalist powers for dependence on the Soviet Union, both in support of its development eff ort and in support of China’s involvement in the Korean War after US forces crossed the 38th parallel. But soon thereafter divisions between the Soviet and Chinese leaderships going back to the 1920s re-opened and by the mid-1950s “the Chinese state [was] sovereign and self-reliant in its political character” (Wang 2009 , xix).

Immanuel Wallerstein has characterized the regimes produced by the socialist revolutions of the 20th century as “mercantilist”, closing themselves off temporarily in order to return to the world market in a stronger posi- tion. He sees them essentially as semi-peripheral areas within the capitalist world-economy (Wallerstein 1984 ). Now, there is of course no denying that post- revolutionary states remained integral parts of the global state system , and as such could not escape the “rules of the game” as they apply to formally sov- ereign states. Th e return of China to big power status in 1971–1972, with the PRC’s successful claim on China’s seat in the United Nations Security Council and the subsequent rapprochement with the USA, testifi ed to this (Kissinger 2012 , 236 ff .). However, whether a country is or is not part of the capitalist world-economy is a diff erent question: is the economy in question integrated into the global division of labour, is it dependent on the world economy for essential imports or fi nance, is its labour force integrated to any substan- tial degree in the global labour market? In the case of China, the answers to these questions were largely negative, and the conclusion is thus unequivocal: between 1949 and 1978, China belonged once more to the external arena, in contact with but not part of the capitalist world.

In another sense, though, Wallerstein was right. Exactly being outside, cut off from the dynamics of the world economy enabled socialist China to lay the groundwork for its autonomous development. Maoist China estab- lished the PRC as a politically sovereign and economically self-reliant state, which embarked on its developmental journey by mobilizing its own internal resources. Th is was a journey through uncharted waters, “crossing the river by feeling for the stones” (Wang 2009 , xxi). Repeatedly, the project was derailed

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by internal convulsions: the Great Leap Forward (1958–1961) and the Great Proletarian Cultural Revolution (1966–1976) produced enormous human suff ering and have generally been considered major disasters. In spite of that, though, economic growth rates remained high (see Table  16.1 ). Th e only years with negative growth rates have been 1961–1962 (−27% and −6%), 1967–1968 (−6% and −4%), and 1976 (−2%). Th e overall annual growth rate for the whole Mao period (data are available for the years 1953–1975) comes to 6.8%.

More important perhaps from a developmental perspective, the PRC estab- lished a system of universal education and rapidly reduced mass illiteracy. Th roughout the fi rst half of the 20th century, illiteracy in China hovered around 85–90% of the total population; this fi gure was reduced to 43% in 1959, and to 25% by 1982 (Ross 2006 , 3); between 1982 and 2010, the literacy rate among the population of 15 years and older increased from 66% to 95% (World Bank n.d.). Moreover, the PRC introduced a simplifi ed script and standardized spoken Chinese (Putonghua) in 1955, which since then has been the language of instruction throughout China. Similarly, the Maoist period saw considerable improvement in basic healthcare provision, resulting in a rapid increase in life expectancy from 43 years in 1960, 66 in 1975, to 75 in 2010 (World Bank n.d.).

In short, the socialist revolution in China, in spite of its dramatic disrup- tions, laid the necessary groundwork for the explosion of economic dynamism after the country re-opened its doors to the world market. Th e creation of a strong, centralized, eff ective state; the creation of a uniform “lingua franca”; the provision of free universal education and healthcare; without these achievements history after 1976 would probably not have taken the direction it did (Lin 2013 , 43–56; also Arrighi 2007 , 370–371; and Li 2010a , 9).

Table 16.1 Real GDP growth 1953–2014

Period Average annual real GDP growth

1953–1960 9.6 1961–1970 4.5 1971–1980 6.3 1981–1990 9.4 1991–2000 10.5 2001–2010 10.5 2011–2014 8.1

Source : 1953–1959: https://en.wikipedia.org/wiki/Economy_ of_China (23-07-2015)

1960–2014: World Bank n.d.: World Development Indicators

316 H. Overbeek

Globalization Mark III and the Resurgence of China (1976–2008)

Neoliberal Globalization and the Rise of China

Earlier episodes of globalization took place under the hegemony of a leading power: the Portuguese and then the Dutch during the fi rst wave, the British during the second, and the US during the third. But each wave of globaliza- tion was equally characterized by emerging rival powers, including the new hegemony. Th e Dutch achieved hegemony at the end of the 16th century but by the time of the Peace of Westphalia, they were already being overtaken by the English; the British established their 19th century global hegemony after the Repeal of the Corn Laws in 1846, but from the early 1870s onwards their industrial and commercial leadership was increasingly challenged by the Germans and the Americans. In the same vein, neoliberal globalization took off under conditions of US hegemony, but was at the same time conditioned by the opening up of China. Th e two developments are inextricably intertwined.

Neoliberal globalization was born out of the crisis of Fordism in the core Western economies in the 1970s. Th e reaction of capital to this crisis was twofold. Th e fi rst response was a massive shedding of labour, both by inten- sifying the automation drive in the advanced countries and by relocating labour-intensive production to low-wage countries (what Harvey has called the spatial fi x : Harvey 2006 ). Th e second was the launch of a fi nance-led accumulation model driven by indebted public and private consumption and speculative fi nance (Harvey’s temporal fi x ).

Historically, the incorporation of new areas into the world-economy has always been one key response to capitalist crisis (Wallerstein 1983 ). We should however beware of functionalist reasoning here. As such, the opening up of China, although in time coinciding perfectly with the transition to neo- liberal globalisation in the West, can only be understood in terms of China’s internal development. 6 Nonetheless, the death of Mao in 1976, and the rise to supreme power of the “capitalist roader” Deng Xiaoping in 1978, contributed to a reshuffl ing of forces within China resulting in an unstoppable process of export-oriented economic growth.

6 Th e collapse of the Soviet Union a decade later was of course to no small degree the result of Western pressures.

16 Globalizing China: A Critical Political Economy Perspective... 317

Th e[se] reforms just happened to coincide—and it is very hard to consider this as anything other than a conjunctural incident of world-historical signifi - cance—with the turn to neoliberal solutions in Britain and the United States (Harvey 2005 , 120).

Neoliberal globalization and the awakening of the Sleeping Dragon thus mutually conditioned and intensifi ed each other in complex ways (Hersh 2010 ; Li 2008 ; Li 2010 b). For many observers (e.g. Harris 2009 ; Harvey 2005 ; Hung 2009 ; 2013 ; Li 2008 ; Panitch and Gindin 2013 ; So and Chu 2012 ), this meant that China traded in its socialist system for a fully capital- ist one, thus being re-integrated wholesale into the US dominated neoliberal capitalist world economy. Others (e.g. Arrighi 2007 ; Cui 2005 ; Strange 2011 ; Wang 2009 ) are more reserved on the nature of the transition within China and its potential impact on the global order. As I will argue later, we may well be witnessing since around 2010 a rather substantial shift in the nature of China’s position in the global order. But we fi rst need to trace the trajectory of China’s economic rise since Mao’s death, in the context of the process of neoliberal globalization.

From Mao’s Death to Tiananmen (1976–1989)

Th e era of socialist construction along the lines that Mao set out abruptly came to an end in 1976, when Zhou Enlai and Mao Zedong died shortly after each other. Mao had appointed Hua Guofeng as his successor, but briefl y before his death Zhou had convinced Mao to allow Deng (purged during the Cultural Revolution) to make a come-back as vice-premier. From that position Deng successfully out-manoeuvred Hu and in 1978 launched his Four Modernizations (i.e. reforms in agriculture, industry, defence, and science and technology).

Th e introduction of small-scale private agriculture and the creation of Special Economic Zones (in Shenzhen, amongst others) open for foreign investment set in motion a decade of accelerating growth. China’s GDP rose by 10% on average per year, 7 foreign direct investment infl ows (mostly from overseas Chinese communities initially: McNally 2008 , 114) rose from US$400 million in 1982 (the fi rst year with a substantial infl ow) to US$3.2 billion in 1988 (rising from 0.2% of GDP to 1.0%), foreign trade increased fi vefold and exports rose sharply as a percentage of GDP, from 5.2% in 1979

7 Unless otherwise indicated, data used in this chapter were calculated from the World Development Indicators database to be found on the World Bank website ( http://data.worldbank.org/products/wdi ).

318 H. Overbeek

to 11.7% in 1988. Per capita GDP roughly doubled in the fi rst decade, rising from US$155 in 1978 to US$314 in 1990 (or $1488 in 2011 PPP terms).

Th is initial reform period can be divided into two phases. Th e fi rst (1978– 1984) concentrated on rural reforms. Th e people’s communes were replaced by household-based organizational forms, and prices for agricultural products were raised, leading to rising rural incomes and a reduction of the rural–urban income gap (Wang 2009 , 23–24). During the second phase, reforms con- centrated on the urban-industrial sectors, and especially on the reform of the (often loss-making) state-owned enterprises (SOEs). Th ese were fi rst made independent, then allowed to go bankrupt or be bought up by other fi rms, and fi nally also reformed in terms of their management model. Th e result of these reforms was that old social and economic inequalities resurfaced very quickly (Wang 2009 , 25–27). Th e popular protest movement of 1989, which was initiated by students but which gradually broadened its social base to include the urban working class, must be understood against this background:

As a movement for social self-preservation, the 1989 social movement was inherently a spontaneous protest against the proliferating inequalities spawned by market expansion, and a critique of the state’s handling of the process of reform; as a movement of social protest, however, it also pursued a critique of authoritarianism and the methods of authoritarian rule. (Wang 2009 , 30)

From Tiananmen to the Asian Financial Crisis (1989–1997)

Th e initial response of the CCP leadership (with Jiang Zemin having replaced Zhao Ziyang at the height of the Tiananmen events) had been to tighten the reins and freeze liberalization measures. However, Deng (who no longer had a formal position but was still in eff ect the supreme leader) soon became convinced that to shore up the legitimacy of the regime it was vital to restart and accelerate the process of reform, liberalization and integration into the world market. He unveiled these plans during his Southern Tour early in 1992. Later that year, the Fourteenth Party Congress operationalized this call by defi ning a target 8–9% GDP growth rate as necessary to achieve the ambi- tious goals of building “socialism with Chinese characteristics” (Saich 2011, 85–89). Growth was necessary to ensure rising living standards and suffi cient job creation in the private sector to compensate for the gradual phasing out of outdated and loss-making state-owned industries. In fact, the challenge for the Chinese regime during these years turned out to be more how to limit

16 Globalizing China: A Critical Political Economy Perspective... 319

growth to a manageable speed than how to increase the speed of growth. Average growth in the years 1992–1996 was over 12%, with the economy always on the verge of overheating and infl ationary pressures at times almost uncontrollable. Average annual GDP growth surpassed 10%; exports grew from US$2 billion in 1970 to 11 billion in 1980, to 57 billion in 1990 and to 183 billion in 1997. Foreign direct investment (FDI) infl ows grew from US$3.5 billion in 1990 to 44.4 billion in 1997, just before the Asian fi nancial crisis, illustrating the growing role of foreign capital in the Chinese economic miracle.

Th e balance of the fi rst two decades of China’s globalization is mixed. Th e record in terms of GDP growth, exports, industrialization, is without prec- edent: never before has a big and populous country produced such a sustained growth spurt over such a long period. But the picture is less rosy when we look at some of the social and political consequences. Th e rapid development of the export-oriented market economy—through marketization, privatization and corporatization of SOEs, and deepening liberalization—produced a pro- cess of rapid social transformation and class formation. Th e 1980s and 1990s were on the one hand the decades of the creation of a modern industrial work- ing class, highly exploited but at the same time increasingly self-conscious and involved in numerous forms of social resistance to extreme exploitation and lawlessness (Harvey 2005 ; Henderson et al. 2013 ; Panitch and Gindin 2013 ; So and Chu 2012 ; Wang 2009 ). On the other hand, liberalization, deregula- tion and privatization produced a very distinctive ruling class:

co-existence and interpenetration of various forms of ownership between the state and the non-state domain have provided a golden opportunity for cadres to transform themselves into capitalist owners and managers of semi-state, col- lective, and private properties. (So and Chu 2012 , 174–175)

Th is “cadre-capitalist class” or state class (van der Pijl 2012 ; Elsenhans 1991 , 78–81) uses its control over the state apparatus, or its privileged access to it (through guanxi or informal network relations) to appropriate wealth. Th e survival of such a state class critically depends on the survival of the state as an autonomous and self-reliant entity. Concretely, China’s state class fi nds itself in a contradictory position. It is structurally dependent on maximum openness to the world market for the maximization of its wealth, but its con- trol over the state is at the same time extremely vulnerable both internally vis-à-vis its own people and externally vis-à-vis the dominant class forces in the global economy, which have in the past always in the end expropriated state classes of earlier contender states (van der Pijl 2012 , 512 ff .) Succumbing

320 H. Overbeek

to domestic resistance or to outside imperialist forces is thus the damoclean sword hanging over the head of the Chinese party elites (who fear the fusion of these two threats more than anything). Th e decade following the Asian fi nancial crisis brought some of these contradictions to the surface.

From the Asian Financial Crisis to the Global Crisis (1997–2008)

Th e Chinese decision in 1994 to devalue its currency, the renminbi (RMB), to promote more rapid export growth was a contributing factor to the subse- quent fi nancial instability in East and South East Asia eventually culminating in the mass outfl ow of speculative capital producing what has become known as the Asian fi nancial crisis. But when the crisis broke out in 1997 China kept its exchange rate stable, thus counteracting the threat of a cycle of competitive devaluations in the region (Panitch and Gindin 2013 , 147).

China itself, with its capital controls and closed fi nancial system, was not directly aff ected by the crisis. Th e indirect eff ects were also limited: demand in the developed markets hardly suff ered from the crisis, enabling China to con- tinue its export drive. In fact, just as other “emerging economies” it embarked on a mercantilist off ensive aimed to build up a buff er of currency reserves shielding it against potential future shocks. Th is mercantilist off ensive was greatly aided by China’s accession at the end of 2001 to the World Trade Organization (WTO). Th e share of exports in GDP grew steadily, from some 10% in the early 1980s to a peak of over 39% in 2006. 8 Refl ecting the role of foreign capital, it is estimated that more than half of Chinese exports are produced by the subsidiaries of foreign fi rms (Sauvant and Davies 2010 ). Th is successful export strategy was underpinned by a “managed” exchange rate, essentially keeping the yuan pegged to the dollar.

Domestically, the nature of industrial development—resting on an abun- dance of low-paid low-skilled labour and a prevalence of often foreign-owned export-oriented corporations—provoked continued social unrest. Labour unrest merged with dissatisfaction over environmental hazards, food security issues, rapidly rising inequality and rampant corruption. Th e social safety net that had been provided in the Mao era (the “iron rice bowl”) had evaporated with privatization and the market-oriented reform of SOEs, forcing individ-

8 Th at China is such a successful exporter should not necessarily suggest that China’s economic growth was exclusively the product of its export surplus. Horn et al. (2010) conclude that in the period 2002– 2008, exports explain roughly one-fi fth to one-third of economic growth. In 2009, the year of the huge economic stimulus, overall economic growth was 8.1%, with a negative contribution by exports (−3.2%).

16 Globalizing China: A Critical Political Economy Perspective... 321

ual households to save for life risks such as illness, unemployment and old age (Hung 2008 , 163). Th e new leadership succeeding Jiang Zemin in 2002 (with President Hu Jintao and Premier Wen Jiabao) seemed aware of the chal- lenges and launched the notion of a “harmonious society” as its rallying cry. 9 Its policies were a modest attempt to address the causes of popular discontent, but in their fi rst 5-year term they made little headway.

When the 2008 global fi nancial crisis erupted, the eff ects on China were much more substantial than a decade earlier. Its export markets went into recession, causing a sharp decline in exports, massive lay-off s, and wide-spread bankruptcies. Th e government responded with a massive stimulus programme (over US$550 billion) which mostly went into infrastructural investment fi nanced through cheap credit to local governments and enterprises. While successfully staving off a recession, it soon became clear that the stimulus pro- gramme itself only intensifi ed the underlying contradictions in the Chinese accumulation model that had been building up at least since the early 1990s.

Dilemmas of China’s Ascent Since the Global Crisis

Th e global crisis acted as a catalyst bringing the contradictions of the model much more clearly into the open.

Domestically, social contradictions kept mounting. Issues such as environ- mental degradation, food (in)security, the exclusion of migrant workers, the high cost of medical care, the lack of housing, corruption of offi cials and so on were undermining the legitimacy of the CCP’s rule. More fundamen- tally (and this was greatly enhanced by the 2009 stimulus programme), eco- nomic growth increasingly rested on bubbles: local government debt, shadow banking, stock market and real estate booms. And each attempt by the gov- ernment to stabilize the economy or counter market unrest resulted in a sub- sequent deterioration of the underlying imbalances—including the failed attempts in August 2015 to avert the collapse of the stock markets.

More fundamentally still, it is increasingly recognized that the reliance on very high savings and (public) investment rates is unsustainable, as is its mir- ror image: the extremely low shares for wages and private consumption in

9 Unlike Jiang Zemin, Hu Jintao did not belong to the so-called Shanghai faction, but to the tuanpai , those leaders who had risen through the Party ranks after starting their career in the Communist Youth League. Th e tuanpai ’s power base is concentrated in the inland provinces (the “red states”), and their poli- tics are focused on reducing social inequality and promoting a “harmonious society” and more balanced growth (Li Cheng 2007 , 2008 ; Saich 2011: 98; Hung 2009, Mulvad 2015 ).

322 H. Overbeek

GDP. Th e diff erent imbalances are feeding each other and create powerful vested interests blocking change (e.g. McNally et al. 2013 ; Ten Brink 2013 ). Attempts to “fi x” the problems backfi re: higher wages translate into higher household savings because of the absence of proper welfare and pension sys- tems; higher profi ts and rising income of the higher middle class increas- ingly translate into capital fl ight or more speculation as a consequence of the absence of profi table investment opportunities in the real economy (Hung 2008 ).

In terms of China’s place in the global political economy, too, the 2008 crisis has brought contradictions to a head (Overbeek 2012). China’s foreign economic strategy had focused initially on relying on overseas Chinese capital to kick start an export-oriented industrialization drive (but building on indig- enous strengths in no small part deriving from the Mao period: Arrighi 2007 , 351). Subsequently, the Asian fi nancial crisis pushed China into a second stage of this model: especially after China’s accession to the WTO transna- tional capital moved into China on a large scale, transforming the country into a key production and assembly base for the global markets, which also enabled the government to build up massive currency reserves. Th ese grew from US$143 billion in 1997 to US$1.5 trillion a decade later; they sur- passed the US$2 trillion mark in 2009, and the US$3 trillion mark in 2011, reaching their peak at US$3.99 trillion in June 2014. 10 Th e largest part of the dollar reserves are kept in US government bonds and related securities. China holds about half of all foreign-owned US debt, or one-seventh of the total (Johnson 2010 ). Th is situation has created a deep interdependence between the Chinese and US governments. As Martin Jacques put it, “a Faustian pact lies at the heart of the present relationship between the US and China, which in the longer run is neither economically nor politically sustainable.” (Jacques 2009 : 360).

Th e Chinese have diff erent options to escape their Faustian predicament. Th e simplest option would be to diversify their holdings into other currencies (euro, yen) or gold. So far, however, this road is mostly blocked by the weak- ness of the yen and more recently the euro. Th en, during the fi rst decade of the new millennium, China invested large sums in building up resource reserve stocks (commodity hoarding), but this option too has run its course in the face of the general slowdown of economic growth, fi rst in China’s export markets, then domestically (14% in 2007, 7% in 2014).

10 Source: http://www.chinability.com/Reserves.htm (31-08-2015). Chinese currency reserves are being depleted since mid-2014, most recently in order to fi nance the government’s attempt to stem the sell-off on the Chinese stock exchanges, and at the end of June 2015 stood at US$3.68 trillion ( Wall Street Journal 15 July 2015).

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Two other avenues are more structural in nature, but also take more time to produce results: outward foreign investment and the internationalization of the RMB. China’s outward foreign investment took off substantially follow- ing the launch of the Going Global strategy (1999/2001) and the accession to the WTO (Ma and Overbeek 2015 ). By early 2015, China had become a net capital exporter (Xinhua 2015 ). 11 Th is rapid global expansion of Chinese capital is also refl ected in the rankings of multinational corporations: between 2006 and 2015 the number of Chinese corporations in the top-100 of Forbes increased from 3 to 15 ( http://www.forbes.com/global2000/list/ ).

Th e second option to make China’s international economic position less dependent on the dominance of the US dollar would be the internationaliza- tion of the RMB so that an increasing proportion of China’s foreign trade could be settled in RMB rather than in dollars. Th e international use of the RMB, although still very limited, is increasing steadily. However, full interna- tionalization of the RMB would require the full liberalization of China’s capi- tal account. Due to the immaturity of the banking sector and the structural need for a very high domestic savings rate, this would be risky and poten- tially costly. Th e prospects for full internationalization of the RMB (even if the RMB would be accepted by the International Monetary Fund (IMF) as an international reserve currency as is currently being debated) are there- fore limited: this will be a long and winding road (Germain and Schwartz forthcoming ).

Finally, China is facing two interrelated geoeconomic challenges: it has become very heavily dependent on external resources (food, energy, minerals, etc.), and its trade routes (mostly overseas) are very vulnerable (to piracy, but also in case of confl ict to interception by the US Navy).

Conclusion: Strategic Shift?

Th ese last points highlight an Achilles heel of the Chinese strategy: its con- tinued success critically depends on reaching an accommodation with the USA.  With its political if not proprietary control of Chinese capital, the Chinese state class was content to defer to US hegemony while it could still hope to be accepted as a key partner in the management of the capitalist world economy. Around 2010 it became clear that USA-China divergence has become the dominant trend (Hung 2013 ): the US-led transnational power

11 As is well known, we need to be careful with statistics: reliability and comparability are usually not perfect. Th is is a fortiori the case with Chinese statistics (see Breslin ( 2013 )).

324 H. Overbeek

bloc had basically rejected the Chinese application (through its blocking of an upgrade in China’s standing in the IMF, through the off ensive for a Trans- Pacifi c Partnership (TPP) in response to the WTO impasse, and by misread- ing China’s acquiescence in the case of the Security Council resolution on Libya) while emanating at the same time signals that the Chinese could only perceive as threatening (the “pivot to Asia”, the targeting of regimes in Iran and Russia). Th e Chinese state class, especially after the coming to power of the new leadership under Xi Jinping 12 in 2012, has responded by shifting its focus to fostering new alliances and constructing an alternative interna- tional framework. Th e key components of that new framework are the BRICS (Brazil, Russia, India, China, South Africa) created in 2010, with the plans for a BRICS Development Bank, the Shanghai Cooperation Organization (SCO) created in 1996 but recently revamped with the accession of India and Pakistan, and then the One Belt One Road “initiative” and the Asian Infrastructure Investment Bank (AIIB).

Th e latter two are clearly initiatives to provide hegemonic leadership to expanding regional networks, and the successful recruitment of traditional US allies such as Australia and the United Kingdom (which both ignored heavy US pressure) to the AIIB may well signal the coming of age of the China as a 21st century global power.

It is obviously too early to say what the outcome will be (as So and Chu state). Th e Chinese challenge can be defeated by a successful US counter- off ensive (Panitch and Gindin 2013 ); China may be incorporated into the order established by the transnational capitalist class (Harris 2009 ); or it may successfully withstand global neoliberalism (Arrighi 2007 ; Strange 2011 ; Ten Brink 2014 ). Some even think it possible (although less likely every day) that domestic pressures may force the Chinese leadership to return to the socialist path (Wang 2009 ; van der Pijl 2012 ). What is certain, however, is that over the next decades the global political economy will be decisively shaped by the trajectory of China’s rise and by the relationship between US ruling elites and the emerging Chinese state class.

12 Xi Jinping belongs to the so-called princeling faction: princelings are the off spring of revolutionary heroes and other prominent Party leaders: they have been among the greatest benefi ciaries of China’s integration in the world market and the spread of capitalist development, and are regionally concentrated in the coastal provinces (the “blue states”) (Li Cheng 2007 , 2008 ; Hung 2009 ). Xi’s policy preferences can be summarized as “promoting economic effi ciency, attaining a high rate of GDP growth, and inte- grating China further into the world economy”, boasting good relations with prominent US leaders such as Hank Paulson (Li Cheng 2008 : 85–6). For more information on his network, see Li Cheng 2014 –2015.

16 Globalizing China: A Critical Political Economy Perspective... 325

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