by Adam Tooze
In October 2008 Ukraine had no option but to follow Hungary to the IMF. Kiev signed up to a $16.4 billion loan package. The IMF’s approach was not demanding by its usual standards. It asked for Ukraine to fully fund its budget, to set a realistic exchange rate and to ensure that its financial system was stable. But even this was more than Kiev could manage. The exchange rate was allowed to devalue from the overvalued rate of 5 hryvnia to the dollar to 7.7, though unofficially it traded as low as 10 to the dollar. The tax increases and subsidy cuts necessary to balance the budget were ruinously unpopular.60 Asked in 2009, “Who bears the most responsibility for the difficult socioeconomic situation in Ukraine?” 69 percent blamed the heroes of 2004, with 47 percent singling out Yushchenko and 22 percent naming Tymoshenko. Yushchenko’s personal approval rating hovered between 2.5 and 5 percent.61 The upshot was paradoxical. On the one hand, the impasse in Ukraine’s post–cold war development was more evident than ever. What hope there was of economic development lay in further integration with the West even at the expense of painful structural adjustment. On the other hand, by the autumn of 2009 the most popular politician in Ukraine was Viktor Yanukovych, the representative of the Russian-oriented “party of the regions” with its base in eastern Ukraine, the thuggish dinosaur of the transition era whose rigged election victory in 2004 had triggered the Orange Revolution.
The one point of relief for Ukraine in 2009 was that geopolitical tension between East and West seemed to be subsiding. With Medvedev in the Kremlin, the West scrambled to “reset” relations with Russia. But the fragility of the situation was painfully exposed in January 2009 when a dispute between Russia and Ukraine over unpaid bills and gas prices left Ukraine without heat in the depth of winter and interrupted flow through the pipelines running west to Europe.62 The dispute was resolved only with EU mediation and a price increase for Gazprom that would become an albatross around the neck of Prime Minister Tymoshenko. Though Ukraine was far from being headline news, it was already in 2008–2009 drifting into an explosive state. As Austrian foreign minister Josef Proell presciently remarked in February 2009: “Ukraine is a very important keystone country and we must avoid a domino effect inside the EU, if there is economic and political catastrophe in such a huge neighbouring country. . . . We don’t see this scenario developing now. But we must prepare and keep an eye on Ukraine.”63
Chapter 10
THE WIND FROM THE EAST: CHINA
If the immediate impact of the financial crisis was to impose an uneasy truce on the old battlefields of the European cold war, the shocking realization of 2008 was how far both sides were willing to go. In Moscow, NATO’s heedless attempt at expansion and the clash with Georgia would not be forgotten. Russia had made good on Putin’s announcement at Munich that the unipolar moment was passing. And the Americans knew it was true. But when they thought of multipolarity, they did not think first and foremost of Putin’s ramshackle regime. They thought of China. And so, in fact, did Russia’s own best analysts.1 The possibility of a Sino-American crisis was obvious to both sides. And the unexpected storm in the North Atlantic financial system further heightened tension.2 But Beijing and Washington avoided disaster. Neither side wanted to take the kinds of risks that produced the violent clash in the Caucasus.
In 2008 Chinese opinion was alarmed to discover that their prized portfolio of dollar assets contained not just actual Treasurys but GSE debt, issued to finance the expansion of American mortgage lending. As in Russia, public opinion in China was indignant. Why was poor China financing America’s excess? As a sign of its impatience, Beijing allowed its spokesmen to make dramatic and unusually frank statements. If the United States allowed the GSE to fail it would be a “catastrophe,” China let it be known.3 Toward the end of 2008 the Atlantic magazine garnered an interview with a fast-talking manager of China’s sovereign wealth fund.4 The result was a startling insight into a topsy-turvy world. Over recent months, Gao Xiqing remarked, the world had watched as America, “after months and months of struggling with your own ideology, with your own pride, your self-righteousness,” had finally applied “one of the great gifts of Americans, which is that you’re pragmatic.” The Fed and the Treasury had intervened on a massive scale to stabilize the financial economy, so now, Gao quipped, when the Chinese looked to the United States, what they saw was not capitalist democracy, but “socialism with American characteristics.”
Cutting though it might have been, Gao’s analysis was not Marxist enough. It hadn’t been only ideology and vanity that stood in the way of a solution in September and October 2008. Interests had been at stake. Convening the “executive committee of the bourgeoisie” was never going to be a simple task. But, then, Gao was not a party theorist. He was an alumnus of Duke Law School and sported a CV including time spent working for Richard Nixon’s Wall Street law firm. But with or without the theory, his sense of the shifting balance of power was acute. “This generation of Americans is so used to your supremacy. Your being treated nicely by everyone. It hurts to think, Okay, now we have to be on equal footing to other people. ‘On equal footing’ would necessarily mean that sometimes you have to stoop to appear to be humble to other people. . . . The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and . . . I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money. Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back!”
As Barack Obama’s stunning election victory demonstrated, many Americans agreed with Gao. And, in fact, the outgoing Bush administration was doing its very best to be “nice.” What the Chinese really wanted was a total government guarantee for Fannie Mae and Freddie Mac debt. That would have had truly dramatic implications for the US government fiscal position, adding more than $5 trillion to the public debt at a stroke. Fannie Mae had been privatized during the Vietnam War for a reason. But in taking the GSE into conservatorship, Treasury Secretary Paulson did the next best thing. Even if it outraged the right wing of the Republican Party, the managerial elite knew that it was essential. Nor was President Bush too proud to phone Beijing to deliver the message personally.5
The Chinese cut back their GSE holdings but they did not offload them like Russia, they merely reduced them to their level in the summer of 2007 before Gao and his colleagues had embarked on their ill-advised program of reserve diversification. Chinese purchases of Treasurys, meanwhile, increased. China’s total holding of US securities continued to rise from $922 billion in June 2007 to $1,464 billion two years later.6 Nor was this surprising. Panic and crisis, turned US Treasurys into the most desirable asset in the world. Everyone wanted safety. Treasury prices were rising, yields soaring, so too was the dollar. If China had wanted to diversify out of its dollar assets, this was the moment to do it. There was insatiable global demand for safe dollar assets. But what the crisis revealed was that China’s options were limited. What other safe assets were there to buy? For China to have bought Japanese bonds would have created an entanglement that was potentially even more explosive. European bond markets weren’t deep enough. China and America were locked together willy-nilly. Their interdependence was structurally conditioned and this went not only for foreign investments, but for trade too.
I
Given the scale of Chinese export success and its accumulation of foreign assets, Western observers are apt to believe that China’s growth must be “export dependent.” But this is an optical illusion that reflects our recalcitrant Western-centric view. Exports are important to China, and its insertion into the world economy has transformed global trade. But even before the crisis China’s domestic economy was large and it was growing extraordinarily rapidly, far more rapidly than China’s markets abroad. China had made itself into an export champion, but in so doing it had also fostered imports—of commodities and components from Australasia, the Middle East, Afri
ca, the rest of Asia and Latin America, as well as technology and advanced machinery from the West. A large part of the value in China’s world-beating exports was accounted for by imported raw materials and subcomponents. As a result, net exports accounted for a smaller share of Chinese GDP growth before 2008 than one might imagine. In fact, no more than one third of China’s growth from 1990 was driven by exports, with two thirds coming from domestic demand.7 This was a very different balance from that of a truly export-dependent economy, of which Germany was the quintessential example. With slow domestic investment and consumption, the vast majority of Germany’s growth after 2000 was accounted for by foreign demand. In China, far and away the main driver of growth was its enormous wave of domestic investment. As China’s cities expanded and its infrastructure modernized at a staggering rate, the physical reconstruction of the country sucked the entire Chinese economy up with it.
By 2008 the immense dynamism of China’s domestic demand and its central position as a regional trading hub in East Asia suggested to some analysts that Asia might be on the point of “decoupling” from America and Europe.8 In the spring of 2008, as the rest of the world slid toward recession, Beijing’s main worry was that China’s economy was expanding too fast. Growth in consumption was roaring along at more than 20 percent per annum. The People’s Bank of China raised interest rates and government fiscal policy was tightened to choke off the boom. Meanwhile, China’s government machine was reorganized to concentrate responsibility for more balanced national growth in centralized superministries.9 What no one reckoned with was the sheer force of the global trade collapse. Whereas in July 2008 Chinese exports were growing by 25 percent, imports by 30 percent and FDI by 65 percent per annum, six months later China’s exports were falling by 18 percent, imports by more than 40 percent and FDI by 30 percent. It was an astonishing switchback. Even if net exports normally accounted for only a third of China’s growth, the impact was severe. In the fall of 2008 South Korean and Taiwanese corporations suddenly began to shutter their Chinese operations.10 At the same time, cash-hungry Western banks such as Bank of America, UBS and RBS sold up and pulled out. But these were pinpricks when compared with the impact of falling export orders on China’s labor market. As the winter of 2008–2009 approached, 30 percent of China’s gigantic annual surge of college graduates—5.6 million per annum—were unable to find work. The reserve army of tens of millions of rural migrants fared even worse. For the Mid-Autumn Festival in October 2008, 70 million returned to their homes in the provinces, of whom only 56 million made the trip back to the cities after the break. Of those, according to World Bank estimates, 11 million were without jobs. Altogether, at least 20 million, and perhaps as many as 36 million, Chinese workers were left idle.11
Ever watchful for signs of domestic social unrest, Beijing knew that it had to react. Already on November 5 the State Council convened an emergency meeting to agree on a 4 trillion yuan ($586 billion) spending program. This amounted to a remarkable 12.5 percent of 2008 GDP. It was supplemental to existing investment plans and was to be disbursed by the end of 2010. It was the first truly large-scale fiscal response to the crisis worldwide. On Sunday, November 9, 2008, as the plan was revealed to the press, the State Council declared: “Over the past two months, the global financial crisis has been intensifying daily. . . . In expanding investment, we must be fast and heavy-handed.”12 And the declaration by the State Council was given additional force by a party instruction, Central Document No. 18, which called for a “package plan to counter the global financial crisis.” The word used to refer to the crisis-fighting measures was the old Mao-era term jihua, or plan, rather than the newfangled word for softer government programs or initiatives, guihua, which had come into widespread currency since 2006.13 Instructions to the press required reporting to “stay upbeat, to avoid panic and contribute to consumer confidence.”14
In November 2008 fiscal policy was pushed in China with the kind of urgency that the West reserved for central bank initiatives and bank bailouts. It was Tim Geithner’s “maximum force” approach but applied to public spending rather than monetary policy. The National Development and Reform Commission, the lead agency for Chinese economic policy, called on local government to “make every second count.” Central Document No. 18 shocked the local party apparatus into action. In the words of a leading American analyst, Document No. 18 “added to the sense of urgency, communicating the sense that it was OK to overturn ordinary obstacles to spending the money.” Over the days that followed, across China, provincial party meetings were hurriedly convened to “seize the favorable opportunity created by expansionary fiscal policy and the ‘appropriately loose’ monetary policy,” as one Shandong committee declared. On the evening of November 11 in Wugong County in Shaanxi Province, a “County Leadership Small Group for Implementing Central Document No. 18” was convened, to make the most of “an extremely rare and precious opportunity.” The aim, the county leadership group declared, was to “concentrate our forces and act quickly, strengthen our links with the provincial and municipal authorities, and make sure that more keypoint investment projects come to our county. . . . Getting more project funding is our top current task.” Within a year this party-led mobilization got 50 percent of China’s stimulus projects under way.
Reconstruction following the terrible Sichuan earthquake of May 2008, which had left more than seventy thousand dead and millions homeless, provided one obvious focus of attention. In the aftermath there had been an upsurge of public criticism and popular activism criticizing the inadequacy of many of China’s public buildings and demanding redress. For the party’s local leaders, crash stimulus spending offered a chance to reassert their authority.15 A wider programmatic frame was provided by the National Development and Reform Commission’s promise of “scientific developmentalism.”16 Funds were to be concentrated in ten sectors, including health care, education (particularly in the relatively deprived and politically contested western regions of China), low-income housing on the edges of China’s gigantic new cities, environmental protection, technological innovation, superhighways, urban electrification, the coal distribution network and railways. The popularly minded leadership team of President Hu Jintao had opened discussions of health-care reform already in 2005 in the wake of the SARS crisis. Something needed to be done about the glaring disparities in health coverage between rural and urban areas.17 After several years of debate, the economic emergency of 2008 swung the decision quite suddenly toward a system centered on central government spending. On April 7, 2009, Beijing announced that health insurance coverage would be extended from 30 to 90 percent of China’s population and that central funds would be allocated to pay for the construction of two thousand county hospitals and five thousand township-level clinical centers. It was the largest expansion in health-care provision in world history to date and it was “inextricably interwoven with the stimulus package.” Beijing was happy to approve spending on hospitals, clinics and public insurance subsidies “because concerns about short-run deficits” had “evaporated. . . . The economic crisis . . . opened a window in which a more aggressive fiscal approach to social policy has become possible.”18
The gigantic surge in stimulus spending also paid for what is perhaps the most spectacular infrastructure project of the last generation anywhere in the world, the construction of China’s high-speed rail network (HSR). In the first phase of Chinese growth, priority had been given to motorization and highway construction. Now rail came to the fore. After “borrowing” technology from the pioneers of HSR—Japan, Germany and France—China embarked on a program that dwarfed all previous efforts. Between 2008 and 2014 the network of rail lines suitable for traffic at speeds of 250 kilometers per hour or more was expanded from 1,000 kilometers to 11,000 kilometers. Journey times from Beijing to Shanghai were cut to 4.5 hours for an 819-mile trip, compared with the 7 hours that the Acela—the pride of America’s Amtrak—takes to cover the 454 miles from Boston to Washingt
on, DC. Not only did China pioneer ultrafast trains capable of cruising at 360 kilometers per hour. The economies of scale opened up by the gigantic construction program also made China into the technological leader in rail-line and viaduct construction.19 Gigantic snail-like machines would lay the track in a continuous length, mile after mile, across endless arrays of standardized, prefabricated concrete pillars. According to World Bank estimates, even allowing for lower labor and land costs, China’s costs of construction were a fraction of those in Europe and North America.
Following the spectacular 2008 Olympics, the promptness and scale of China’s fiscal stimulus was further proof of the mobilizing capacity of the Communist regime. Compared with the sluggishness of many Western states, it is hard to avoid invidious comparisons. Both as presidential candidate and newly inaugurated president, Barack Obama referred frequently to China’s great strides in infrastructure.20 But this well-deserved credit should not obscure the tensions that lurked beneath the surface. In China the stimulus was deeply controversial. To many observers it seemed that, driven by a crisis in the West, the Chinese economy was being sucked in precisely the wrong direction. Was the stimulus a spectacular demonstration of state power, or further proof of the addiction of the Chinese power elite to an unsustainable growth model?21