Neoliberalism Has Met Its Match in China

When the Federal Reserve cut interest rates on July 31st for the first time in more than a decade, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4%, and GDP growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.

The explanation of market pundits was that we’re in a trade war and a currency war. Other central banks were cutting their rates and the Fed had to follow suit, in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive on foreign markets, helping our manufacturing and labor bases.

Over the weekend, President Trump followed the rate cuts by threatening to impose a new 10% tariff on $300 billion worth of Chinese products effective September 1st. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, August 5, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.

The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which just prolonged the Great Depression. As economist Michael Hudson observed in a June 2019 interview with Bonnie Faulkner, making American products cheaper abroad will do little for the American economy, because we no longer have a competitive manufacturing base or products to sell. Today’s workers are largely in the service industries – cab drivers, hospital workers, insurance agents and the like. A cheaper dollar abroad just makes consumer goods at Walmart and imported raw materials for US businesses more expensive. What is mainly devalued when a currency is devalued, says Hudson, is the price of the country’s labor and the working conditions of its laborers. The reason American workers cannot compete with foreign workers is not that the dollar is overvalued. It is due to their higher costs of housing, education, medical services and transportation. In most competitor countries, these costs are subsidized by the government.

America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. Typically, if the businesses cannot repay the loans, neither the banks nor the businesses are put into bankruptcy, since that would mean losing jobs and factories. The non-performing loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government, and the loans were created on the banks’ books in the first place (following standard banking practice globally).

As observed by Jeff Spross in a May 2018 Reuters article titled “China’s Banks Are Big. Too Big?”:

[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever.…

It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.

Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing.” Beijing will “come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”

To avoid political and labor unrest, Spross wrote, the government keeps everyone happy by keeping economic growth high and spreading the proceeds to the citizenry. About two-thirds of Chinese debt is owed just by the corporations, which are also largely state-owned. Corporate lending is thus a roundabout form of government-financed industrial policy – a policy financed not through taxes but through the unique privilege of banks to create money on their books.

China thinks this is a better banking model than the private Western system focused on short-term profits for private shareholders. But U.S. policymakers consider China’s subsidies to its businesses and workers to be “unfair trade practices.” They want China to forgo state subsidization and other protectionist policies in order to level the playing field. But Beijing contends that the demanded reforms amount to “economic regime change.” As Michael Hudson puts it:

This is the fight that Trump has against China.  He wants to tell it to let the banks run China and have a free market.  He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise.  In effect, he wants the Chinese to be as threatened and insecure as American workers.  They should get rid of their public transportation.  They should get rid of their subsidies.  They should let a lot of their companies go bankrupt so that Americans can buy them.  They should have the same kind of free market that has wrecked the US economy. [Emphasis added.]

Kurt Campbell and Jake Sullivan, writing on August 1st in Foreign Affairs (the journal of the Council on Foreign Relations), call it “an emerging contest of models.”

An Economic Cold War

In order to understand what is happening here, it is useful to review some history. The free market model hollowed out America’s manufacturing base beginning in the Thatcher/Reagan era of the 1970s, when neoliberal economic policies took hold. Meanwhile, emerging Asian economies, led by Japan, were exploding on the scene with a new economic model called “state-guided market capitalism.” The state determined the priorities and commissioned the work, then hired private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state.

The Japanese state-guided market system was effective and efficient – so effective that it was regarded as an existential threat to the neoliberal model of debt-based money and “free markets” promoted by the International Monetary Fund (IMF). According to William Engdahl in A Century of War, by the end of the 1980s Japan was considered the leading economic and banking power in the world. Its state-guided model was also proving to be highly successful in South Korea and the other “Asian Tiger” economies. When the Soviet Union collapsed at the end of the Cold War, Japan proposed its model for the former communist countries, and many began looking to it and to South Korea as viable alternatives to the U.S. free-market system. State-guided capitalism provided for the general welfare without destroying capitalist incentive. Engdahl wrote:

The Tiger economies were a major embarrassment to the IMF free-market model.  Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda.  So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course.  In east Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy – an Asian form of benevolent paternalism.

Just as the US had engaged in a Cold War to destroy the Soviet communist model, so Western financial interests set out to destroy this emerging Asian threat. It was defused when Western neoliberal economists persuaded Japan and the Asian Tigers to adopt the free-market system and open their economies and their companies to foreign investors. Western speculators then took down the vulnerable countries one by one in the “Asian crisis” of 1997-98. China alone was left as an economic threat to the Western neoliberal model, and it is this existential threat that is the target of the trade and currency wars today.

If You Can’t Beat Them …

In their August 1st Foreign Affairs article, titled “Competition without Catastrophe,” Campbell and Sullivan write that the temptation is to compare these economic trade wars with the Cold War with Russia; but the analogy, they say, is inapt:

China today is a peer competitor that is more formidable economically, more sophisticated diplomatically, and more flexible ideologically than the Soviet Union ever was. And unlike the Soviet Union, China is deeply integrated into the world and intertwined with the U.S. economy.

Unlike the Soviet Communist system, the Chinese system cannot be expected to “crumble under its own weight.” The US should not expect or want to destroy China, say Campbell and Sullivan. Rather, we should aim for a state of “coexistence on terms favorable to U.S. interests and values.”

The implication is that China, being too strong to be knocked out of the game as the Soviet Union was, needs to be coerced or cajoled into adopting the neoliberal model. It needs to abandon state support of its industries and ownership of its banks. But the Chinese system, while obviously not perfect, has an impressive track record for sustaining long-term growth and development. While the U.S. manufacturing base was being hollowed out under the free-market model, China was systematically building up its own manufacturing base, investing heavily in infrastructure and emerging technologies; and it was doing this with credit generated by its state-owned banks. Rather than trying to destroy China’s economic system, it might be more “favorable to U.S. interests and values” for us to adopt its more effective industrial and banking practices.

We cannot win a currency war by competitive currency devaluations that trigger a “race to the bottom,” and we cannot win a trade war by competitive trade barriers that simply cut us off from the benefits of cooperative trade. More favorable to our interests and values than warring with our trading partners would be to cooperate in sharing solutions, including banking and credit solutions. The Chinese have proven the effectiveness of their public banking system in supporting their industries and their workers. Rather than seeing it as an existential threat, we could thank them for test-driving the model and take a spin in it ourselves.


This article was first posted on Ellen Brown chairs the Public Banking Institute and has written thirteen books, including her latest, Banking on the People: Democratizing Money in the Digital Age She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at

26 Responses

  1. Not mentioned: rather than tariffs, domestic content requirements would be more effective in reviving local economies.

    • This is beautiful, Ellen. I wish more people in the right places would pay more attention to you and Michael Hudson. Our leaders are so blinded by their own hubris (and the Chicago school) that they can’t admit to the possibility that some other country could have a better economic model than our toxic capitalist system.

  2. Great take on the Chinese/US trade war. Private Bank capitalism have been quite vicious. Does China have Investment banks like Goldman Sachs, and JPM that have interests in manipulating stocks and commodities for profit. Futures market seems to have a lot of action. Derivatives market is Colossal. Like Ellen said, our real estate even in cheaper cities(Cleveland) real estate prices have gone up 100% since 2007-2008 times. Ironic that having a big University like Cleveland State of Case Western is the best support for housing prices(gentrification), yet the students come out with 30k-120k of debt just for an undergrad degree.

    Lots of intelligent libertarian’s always come back to its not Capitalism’s fault or Private money bankings fault, but its the fault of not having enough competition. Some of my best friends really believe this.

    With Health care I can see this argument to some degree. Housing….. in Cleveland there are thousands of abandoned, and foreclosed and just plain cheap in not so amazing neighborhoods. Seems a lot of the private money and gov grants go to the wealthier areas. for a $75,000 house in Cleveland the rent will usually be close to 900-1000 per month yet the mortgage on the same house will be 400-500 if that. Lots of Clevelander’s are on Medicaid and EBT(food stamps).

    Great article Ellen Brown – very lucky to have a unique, refreshing take on economics and such. Keep it coming, keep on educating.

  3. We should not forget that from the early 30s to the mid 50s the US did have a national bank, the RFC. It was used extensively in the 40s and can be called the real power behind the “war time” economy. Ike closed the RFC leaving the SBA, the Import/Export bank and Fannie Mae as surviving artifacts of the old RFC.

  4. We should not forget the US did have a national bank from the early 30s to the mid 50s, the RFC. It was used extensively in the 40s and was responsible in many ways for the robust economy that was called a “war time” economy. Ike closed the RFC in the mid 50s leaving the SBA, the Import/export bank and fannie mae as artifacts of the old RFC.

  5. You don’t have the sequence of events in the proper order. Chairman Xi Jinping reneged on buying US agricultural products in large quantities and Xi also said he’d stop the sale of Fentanyl to the US, and many Americans continue to die. Xi’s continued negotiation in bad faith is all on the Chinese president (or more accurately, Chairman-for-life.)

  6. 1) china has maintained unfair trade policies with the usa for the last 30yrs.
    2) ex: usa corps are required to take 51% china govt partner. china corps enjoy 100% ownership of corps in usa.
    3) china fixes currency exchange, every other major currency flee floats
    4) forced technology and IP transfers if usa corp wants to do biz in china.
    5) usa corps so desperate for china biz, they agree to terrible terms.
    6) china blackmails usa corps with expulsion of hollywood movies from china theaters, if they dare show china in bad way. these yields a msm media blackout of confronting ccp bad policies.

  7. This also proves that market based capitalism can’t compete with state sponsored capitalism. The west is in trouble because china will just print whatever it needs to keep things propped up. keep point from ellen: since china govt owns most banks, they don’t need to foreclose, so they either carry the bad loan, in perpetuity or write it off. they avoid the bankster steal at firesale prices. have to admit, this is a much kinder approach then throwing people out on st….?

  8. […] Neoliberalism Has Met Its Match in China […]

  9. I’m a big fan of Engdahl, this article was very enlightening with great insight thank you.

  10. State-sponsored capitalism is a more advanced combination of (blind) market-based capitalism OTOH, and state-managed communism OTOH, (which excessively violated human nature eg, by reducing incentive for personal effort/reward).

    For an understanding of the mechanics of this more progressive economics, see MMT. – the basic axiom being: the constraint to nations’ prosperity is *available real resources*, not money (which is not a real resource but a convenient means of measuring the quantum of available real resources, including technology, skills, labour, and materials). Hence the concept of a central bank enabling public policy delivery, alongside its more restricted traditional role of reserve for private banks.

    Neoliberalism – the myth that individuals acting in their own self interest will achieve the best outcome for the community via free markets directed by an ‘invisible hand) – is the oppressive economic system causing political dysfunction in the western democracies.

    Btw, Libertarianism itself is based on a fundamental misunderstanding of reality: ‘natural law’, ie’ the idea, or conscious awareness, of ‘order’ or ‘justice’ or “imprescriptible individual rights” exists only in the human cortex (thinking, self-aware brain, late in evolutionary terms); not in the competitive and predatory *natural prehuman world*, in which creatures’ reptilian and mammalian brains instinctively (unconsciously) drive survival of the individual creature.
    Note: the vestiges of these pre-cortex brains still exist in homo sapiens, which explains human irrationality.
    ‘Justice’ obviously doesn’t exist in nature (as a cursory glance at any wild-life TV program will show). We must create economic justice ourselves (ie eradicate poverty, as per MMT) .

  11. […] View Reddit by psychothumbs – View Source […]

  12. Until the government owned Bank of Canada joined the Bank of International Settlements, it too, had leeway to conduct business as the Chinese state owned banks. What is missing from the article, is that with a state owned bank, the government can borrow at 0% interest against anticipated future “receipts”. This allows greater access to capital to build infrastructure, which China is now doing. The US Interstate road system was highly subsidized by the US military, as was the dredging of the Mississippi to turn Memphis into a port. Both were financed on a debt basis.
    Also missing is that before the “tiger” economies were picked off one by one, layoffs of workers were inconceivable, and a drastic. last measure. They understood that unemployment takes money out of the economy.
    As an aside, in the mid 1980s, Lee Iacocca predicted the demise of the US auto industry, and linked it to health care insurance costs. He noted that all of the competitors had universal systems, and their costs through taxes to pay for it, were about 1/5th of US automakers. How did the US manufacturers respond? Free trade through NAFTA and moving plants to Mexico.
    The reality is, that the neo-liberal model places profit as the highest priority. Most of the world’s population places well-being at the top. They don’t deny profit is necessary, but how much for so few is the issue.

  13. Reblogged this on The Most Revolutionary Act and commented:
    [B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever.…

  14. thanks for the note ellen. just printed the article from truthdig. thank you very much for keeping us much better educated. peace n love, eddie


  16. […] plenty I agree with in Ellen Brown’s article, “Neoliberalism Has Met Its Match in China,” and I genuinely like Ellen. She smart, nice, thoughtful, and has the best interests of all […]

  17. […] Neoliberalism Has Met Its Match in China […]

  18. I always appreciate Ellen’s articles and post links whenever i can. Always insightful and excellent. However, it will probably takes an economic collapse for people in American wake up and demand change and for the US to adapt this kind of change.

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