In the battle between the two essentially capitalist economic models – China’s state capitalism and America’s financial capitalism – neither is immune from a collapse of the other, and both currently face a number of challenges
Since the end of the cold war, the West, the English-speaking part of it in particular, has evolved towards financial capitalism, while China has developed its own unique brand of state capitalism. Their evolution has been interdependent. China has developed a parallel production economy to the West at a fraction of the cost. The arbitraging opportunities for multinational companies have sustained its rapid export growth. The resulting income growth has given China the resources to develop a state-controlled economy.
China’s development model of offering low-cost arbitraging opportunities to multinational companies has kept global inflation low. The major central banks in the West have responded by running easy monetary policy. The resulting liquidity boom has fuelled financial capitalism in the West.
Using third-world labour to hold down wages in the West is the most consequential piece of financial capitalism. Employment no longer means normal life. Most working families in the US depend on debt to pay for part of their expenses every month. The working poor has become an accepted phenomenon even in western Europe.
While state capitalism can be highly effective and powerful, it suffers from declining efficiency. That trend can only be offset by a rising national savings rate to achieve the same growth rate. This has been the trend since 2002.
This has been possible because Chinese people have enormous capacity in adjusting to all sorts of pressure. Their ability to adjust, however, is quite dependent on income from export success. While China can appear very stable internally, it is quite vulnerable to any disruption in the global economy.
America’s financial capitalism increases internal inequality and, because of its dependency on debt, suffers financial crises from time to time. China’s state capitalism is quite vulnerable to a prolonged downturn in the global economy. If the US model falls apart first, which I think likely because of a combination of political upheavals and financial crises, it would induce an extended downturn in the global economy. China’s state capitalism may not survive that, either.
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Dr Andy Xie 謝國忠 is a renowned Chinese economist based in Shanghai who has been named one of the “50 Most Influential Persons in Finance” by Bloomberg.
Andy Xie’s skill and has been tried and tested through the years. He is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States.
He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Before that, Andy spent two years with Macquarie Bank in Singapore an associate director in corporate finance and five years as an economist with the World Bank. Dr Andy Xie is currently a director of Rosetta Stone Advisors.
Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.