A new cold war is upon us, but only China is in a position to push it beyond the point of no return. That moment will come when China’s policymakers cross the Rubicon and decide to wean Chinese economic growth off the US trade deficit.
ATHENS – True hegemons prevail not by force but by offering hard-to-resist Faustian bargains. A prime example is the “Dark Deal,” which underpinned China’s economic miracle prior to the new cold war with the United States. That arrangement now hangs by a thread.
“Our Dark Deal,” a Chinese official once explained to me, “turns on the US trade deficit, which keeps demand for our manufactures high. In return, our capitalists invest the bulk of their dollar superprofits into America’s FIRE [finance, insurance, and real estate]. Once this process got underway, America shifted much of its industrial production to our shores.”
For nearly a half-century, the Dark Deal allowed China to convert its excess production – or net exports – into rights over property and rents in the US. It ensured that the dollar’s supremacy was just as functional to the interests of US rentiers as it was to Chinese capitalists.
The longevity of America’s global supremacy is, therefore, fully intertwined with China’s dilemma and, in a roundabout way, with America’s toxic domestic politics, which reflect the hollowing out of its working and middle classes. Without the dollar’s global reign, America’s de-industrialization would not have accelerated, and Chinese capitalists would not have been able to extract colossal surplus value from Chinese workers and stash it in America’s rentier sector.
Whatever America’s rationale for targeting China, the cold war that the US launched under former President Donald Trump and escalated under President Joe Biden has placed enormous pressure on US conglomerates and the Communist Party of China alike to think beyond the Dark Deal which had hitherto been central to their respective interests. Whereas conglomerates like Apple can do very little to decouple from China without being ruined in the process, China has a risky but real alternative: deploy its homegrown fintech industry to insulate itself from America’s hostile measures.
Imagine bundling Google, Facebook, Twitter, Instagram, and YouTube in a single application. Then, roll onto the same platform Skype, WhatsApp, Viber, and Snapchat, add e-commerce platforms like Amazon, Spotify, Netflix, Disney+, Airbnb, Uber, and Orbitz, and throw in PayPal, Charles Schwab, and every Wall Street bank’s app. Now stop imagining: This is what WeChat, Tencent’s mobile messaging app, already offers its users, who exchange more than 40 billion messages daily. While streaming music or TV shows, WeChat users do not need to exit the app to send money to anyone within China – or to millions outside of China who have downloaded WeChat and opened a renminbi account with any number of Chinese banks.
This amalgamation of China’s Big Tech and finance (cloud finance, for short) is a potential game changer. Compare a ton of aluminum shipped from Shanghai to Los Angeles to targeted advertisements peddled to Americans via TikTok. Both yield dollars for a Chinese company. But, whereas the aluminum-sourced dollars depend on a Chinese-produced lump of metal physically migrating to America on the coattails of the US trade deficit, the dollars earned by TikTok in the US do not. As Chinese cloud finance grows, China’s rich and powerful find themselves less and less subject either to the US trade deficit or to US policymakers’ power to regulate Chinese goods passing through their ports.
So, here we are: As America’s new cold war threatens to squeeze Chinese conventional capitalism, China could end the Dark Deal that keeps it tied to US hegemony by mobilizing its homegrown cloud finance and pursuing a growth model that no longer relies on the US trade deficit. Were China to take this option, the domestic and global impact would be monumental.
Domestically, the shift away from export-oriented physical manufactures would cause aggregate fixed capital investment to fall from around 50% of China’s national income to no more than 30%, with domestic consumption taking up the slack. Globally, China’s decoupling from the US trade deficit would permit its cloud finance, ably assisted by the People’s Bank of China’s own digital currency, to offer the rest of the world a renminbi-denominated, cloud-based payment system that bypasses fully the currently dominant dollar-denominated and US-policed payment system.
In the aftermath of the US and European authorities’ seizure of the Russian central bank’s reserves in response to the invasion of Ukraine, demand for this Chinese payment system, and China’s cloud finance more generally, is already skyrocketing. Severing the link to the US trade deficit is no longer merely a hypothetical scenario. But do Chinese policymakers really want to pursue it?
If they do, they will be ditching the industrial model at the heart of China’s economic miracle, incurring the wrath of China’s traditional capitalists, who crave access to the US trade deficit and to dollars. If they don’t, China’s economy will continue to rely on a deal that gets darker by the day, as the clouds of the new cold war gather. In the end, perhaps their hand will be forced if the Biden administration persists in its effort to block China’s continued advancement as a technologically cutting-edge society. How and when the Dark Deal gives way to an all-in bet on China’s cloud finance will decide the future of US-China relations – and perhaps the future of us all.
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