China’s stunning economic growth and technological prowess have stoked anxiety that the world’s longest-surviving communist regime is poised to replace the United States as the next global hegemon. Coupled with the expectation that China may emerge from the Covid-19 pandemic less scathed than the West, to many observers the scenario of a US-China power transition appears even more likely, if not inevitable.
We disagree. In a recent article, we detail why much of the current discourse on China’s rise significantly overstates its economic might. China’s model of state capitalism and the dynamics of globalization have contributed to its rapid development over the past four decades. Yet these same factors circumscribe its hegemonic potential for three main reasons.
First, in China’s version of state capitalism, private capital faces serious constraints because the state sector constitutes the economic bedrock of the Chinese Communist Party’s ruling status. State-owned enterprises have been backstopped by the state banking system and shielded by powerful regulators—despite their lower levels of productivity. By contrast, the more efficient private sector has grappled with limited access to official sources of credit and relied on more expensive and riskier types of informal finance.
This structural bias against private capital has deepened in recent years, as China struggles to tackle its ballooning debt and slowing growth rates. Neoliberal economists advise that the Party could either focus on enhancing the efficiency of the state sector or re-allocate more financial resources to the private sector. Both solutions are politically challenging due to the state sector’s structural power throughout the Chinese economy. Neither solution has yet to materialize.
Second, unlike the 19th century liberal world order of Pax Britannica, the reincarnation of globalization since the 1980s has been dominated by a small number of transnational corporations (TNCs) that steer production networks on a global scale. This concentration of value in the hands of TNCs has diminished the relevance of traditional power metrics such as GDP and industrial output.
Beijing recognizes the urgency of internationalizing Chinese companies. Yet the obstacles to realizing this policy goal are daunting. Foreign TNCs are firmly entrenched at the apex of global value chains in key sectors. Meanwhile, China’s national champions aspiring to penetrate those industries are either state-owned or assumed to be agents of the party-state.
As of 2017, the standard index of economic internationalization showed that China’s top TNCs trailed those of other emerging economies, let alone those of the advanced capitalist countries. Since then, the global buying binge of foreign assets by Chinese companies has notably receded, as countries across the world stepped up their screening of perceived state-backed mergers and acquisitions. This backlash against Chinese capital is further thwarting China’s efforts at internationalization.
Third, unlike the earlier mercantilist powers and East Asian developmental states, China was unusually open to foreign capital during its initial decades of economic reform. Enormous volumes of foreign direct investment and export-oriented manufacturing ensued. But so did dependency on high value-added foreign inputs. To be sure, compared with two decades ago, China has progressed in industrial upgrading, contributed more value added in international trade, and emerged as a major hub for R&D spending and patent applications. However, foreign-invested companies overwhelmingly dominate the share of China’s high-tech exports. Furthermore, revenues derived from the use of China’s intellectual property in international trade lag far behind Japan, Germany, the UK, and the US. The most lucrative intellectual property patents continue to be controlled by the West.
In addition to lacking structural power in the world of TNCs, China faces an even bigger challenge—demonstrating leadership in global economic governance. Applying Antonio Gramsci’s insights on a global level, a dominant country’s hegemony rests upon both its material abundance and the perception that its global leadership is both benign and inclusive, if not universal. China lacks these essential qualities. Its development model and trajectory pose unique challenges to gaining consent from other major powers, and in fact, faces growing hostility from the West. There is no “Beijing Consensus” akin to the Washington Consensus of the earlier neoliberal turn.
Indeed, Beijing’s protectionist shift since the mid 2000s has met with strong resistance from both foreign capital with stakes in China and local governments vested in preserving the status quo. Foreign business groups in the developed world, such as the American Chamber of Commerce, the Federation of German Industries, and Japan’s Keidanren, have organized in tandem with their home governments to exert pressure on China’s economic policies.
Rather than cultivating consent from political and economic elites around the world to forge a new hegemonic order, China’s attempt to enhance its global competitiveness has set itself on a colliding course with them. China’s distinctive form of state capitalism not only serves as a rallying point for the West to contest its growing protectionism, but also poses an obstacle for earning the trust of other major capitalist powers. The expanding reach of the party-state into the economy has already obstructed China’s global activities.
While globalization and state capitalism contributed to China’s extraordinary rise, they also created material and ideological constraints on the country’s hegemonic prospects, as compared with those of early rising powers in the history of capitalism. The economic fallout of the Covid-19 pandemic may well narrow China’s GDP gap with the US. Even if that happens, we expect that structural constraints on China’s economic competitiveness and absence of benign hegemonic appeal will endure. The configuration of China’s political economy in the contemporary structure of global capitalism poses profound tensions.
Mingtang Liu is a graduate student in the Department of Sociology at Johns Hopkins University. His dissertation research seeks to analyze China’s growing economic statism in an illiberal world order.
Kellee S. Tsai is Chair Professor and Dean of Humanities and Social Science at Hong Kong University of Science and Technology. Her research focuses on the political economy of China and she is the author of several books, including Capitalism without Democracy: The Private Sector in Contemporary China.
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