What role does economics play in Chinese foreign policy?
Economic development has been China’s focus since the opening up under Deng Xiaoping in 1978. There has been a liberalization away from a centrally planned economy and toward a system that allows Chinese entrepreneurs and business people to take advantage of opportunities in a society that is making the shift from an agrarian to a postindustrial economy. This shift has benefited millions of people in China and continues to drive much of China’s grand strategy.
How does China’s undervaluation of its currency fit into this?
Undervaluation supports an export-oriented growth strategy in which goods are produced cheaply at home and then sold for a profit on the world market. To support that model of development, China has kept its currency pegged at what many economists believe is an artificially low exchange rate. This subsidizes Chinese exporters, giving them a competitive advantage in the world market.
It is in China’s long-term interest to allow its currency to appreciate, and because of that I think it eventually will appreciate. The question is how quickly that happens, and under what circumstances. Publicly berating the Chinese over this issue puts their leaders in a tough spot, just as it would put American leaders in a hard place if China were to criticize us for our policies. Lowering the visibility of the currency issue would make it easier for advocates of currency appreciation within China to make their case domestically.
China also has been criticized for failing to respect intellectual-property rights. Is this part of its economic strategy?
China makes it difficult for foreign companies to operate there unless they provide intellectual property or engage in technology-sharing or forced joint ventures. From China’s perspective, this is part of an innovation strategy that relies on knowledge transfer. China is trying to indigenize world-class levels of technology into Chinese firms. Not surprisingly, some Western companies view this with concern.
It is in China’s own long-term interest to create a legal infrastructure that will support intellectual property, because that is how China will be able to foster genuine innovation domestically. If you look at metrics of innovation, such as the number of patents filed, what you see is that Chinese companies are not bad at squeezing costs out of processes or improving an existing technology, but they are not as good at the kind of radical, path-breaking innovation that Western companies excel at.
How stable is the Chinese economy?
There are several areas of potential instability. One is the possibility of a Chinese real-estate bubble. China has a very high level of domestic savings and a shortage of good investment opportunities. When that occurs, asset bubbles tend to develop as more and more capital seeks fewer and fewer productive investments. Another risk is in Chinese banks. As the state-controlled banking sector extends loans to enterprises or projects that aren’t economically viable, the chances of those loans being repaid decrease, and the risk of the banks becoming insolvent increases. A third risk is domestic inflation. China recently has ramped up its interest rates to curb inflation, but that creates its own risks. A tighter monetary policy could cool the economy, which could create unemployment and political instability.
As China grows wealthier, will it become more democratic?
Everyone hopes that this is the logic that prevails. However, research suggests that so long as the newly empowered elements in Chinese society — businesses, entrepreneurs, and the emerging middle class — are able to do well for themselves and their families under the current system, they will not find it worthwhile to stand in political opposition to the regime. Some Chinese, of course, have spoken up for democracy, but the Chinese government has made clear to its citizens that so long as they play by the rules the government sets, life can be quite good. That has been a compelling message for many typical Chinese citizens. Whether such an arrangement can hold over the long run remains to be seen.
— Interview conducted
and condensed by
Mark F. Bernstein ’83