The Uncertain Rise of China

By Andrew Gabel

about the impending supremacy of China. This feeling of preemptive inadequacy has become so deeply ingrained in the United States leadership and chattering classes that many intelligent, experienced policy officials and political commentators have begun looking across the Pacific Ocean with a surprising degree of longing. It has become a truism that the Chinese juggernaut will soon “overtake” a tired and stagnating United States. But will it? There is a surprisingly strong contrarian case to be made in favor of exactly the opposite: that China is in many ways weaker than it is portrayed with a trajectory far from assured.

The glistening cities on the Chinese coast are, both visually and architecturally, quite impressive. To the casual observer (or the impassioned pundit), nothing underscores America’s inexorable decline more than a Chinese skyscraper or ultra-modern airport. While it is true that China’s total GDP (Gross Domestic Product) may surpass that of the United States in the coming years, this hardly paints a complete picture of the Chinese economy. In fact, it is highly misleading. For instance, according the CIA World Factbook, China has an adjusted GDP-per capita of just $8,500, putting it decisively below countries such the Dominican Republic, East Timor and even Cuba. So while its total output as a country is rather large, the wealth is spread among so many people that the individual Chinese citizen is in actuality quite impoverished. Keep this in mind any time you read column fawning over China’s economic achievements.

In reality, that number is actually rather generous because it is an average; it takes the entire GDP of China and crudely divides it by the population. What this means in practice is that, for every nouveau yuppie chatting on an iPhone in Beijing, there are overwhelmingly more of his countrymen living in abject poverty. The median income in China is significantly lower and, according to the state-run People’s Daily, over 150 million Chinese citizens live on under $1 a day. The vast majority of those living in China are poor even by the standards of developing countries.

Furthermore, the gleam of those recently constructed cities does not outshine the fact that 1 in 4 Chinese do not even have access to running water. In China, the country so many in the U.S. seemed to have developed an inferiority complex towards, 250 million people (the entire U.S. population during the mid-1980s) lack basic plumbing, an amenity the average American have taken for granted since the second Roosevelt administration.

As if that were not enough, 30 to 40 million Chinese still live in caves—equivelent to the entire populations of New Hampshire, Delaware, Maine, Rhode Island, South Carolina, Virginia, Massachusetts and Indiana. Only then can one really begin to understand the difficulties facing Chinese modernization efforts. So while most of the news reports Americans see regarding China’s economic growth consist of cheer-leading its coastal urbanization, the fact remains that many parts of China, usually ignored by the media, make Kabul look like Times Square.

All that being said, the Chinese economy looks, at a distance, very strong. It has put up double digit growth numbers for essentially 25-straight years, even through the global recession, and it has continued to produce quarterly rates that make Western leaders green with envy. But before putting too much stock in raw numbers, it is important to put them in perspective. When China first began to liberalize its economy, after the self-imposed disasters that were the Great Leap Forward and Cultural Revolution, it was one of the poorest nations on Earth (the fact that after decades of double-digit growth it’s GDP per-capita stands at only $8,500 speaks to this fact). Historically, countries starting from low bases of wealth grow much faster than those already rich. The similarly-spectacular rates of growth experienced by Germany and Japan immediately following the Second World War as those nations literally rebuilt themselves from rubble are prime examples. This “catch-up” growth is produced by taking advantage of relatively easy gains inherent in undeveloped countries such as the necessarily high marginal product of capital and, in the case of China, an efficient reallocation of labor. When the Chinese government takes an illiterate peasant farmer, teaches him how to read and puts him in a factory, his productivity increases enormously in the process. Such a strategy has served China well but, due to the laws of diminishing returns, it is not sustainable. Extensive growth has its limits and, sooner or later, gains from such “low-hanging fruit” dry up (the marginal benefit derived from putting the first farmer in the factory is much greater than putting the 300 millionth). Future growth will depend more on innovation, entrepreneurship and efficient capital formation and less on government-backed investment projects. It is an open question as to whether China will be able to keep up its current astronomical growth rates as its baseline prosperity rises and the source of its growth evolves.

But perhaps the strongest case to be made against China’s ascendancy centers on its demographical trends. China’s horrific one-child-policy, morality aside, distorted its population irrevocably. In restricting births, the Chinese government has insured that there will be too few replacement workers to take over as the general population ages. When this happens, productivity will suffer accordingly. Even though the State has rolled back some of the more draconian regulations, China’s birth rate has not recovered. A 2012 study conducted by the Brookings Institute noted that “over 40% of all middle-aged Chinese couples have only one child” and that “it will take less than 30 years for the share of the population aged over 65 to rise from the current 9% to 25%”. It goes on to conclude that between “1980-2010, the effect of a favorable population age structure accounted for between 15% and 25% of per-capita GDP growth”. The age structure upon which so much of China’s growth has been built was never sustainable and, unfortunately for China, the positive population trends are already beginning to reverse. As the century progresses, China’s population will become top-heavy, with more and more of the elderly relying on a shrinking pool of young workers. China is not the only country that is facing a rapidly aging population but its problems are worse than any other given its size and relative poverty. China’s inevitable slowdown in economic growth combined with its demographic time bomb points to one conclusion: future stagnation. Simply put, China will become gray long before it becomes wealthy.

Indeed, there are signals that China is already starting to falter. Growth has slowed and the Chinese Academy of Social Sciences estimates that over 90,000 protests, or “mass incidents” as they are called in China, are already happening every year (unreported by the state-run media of course). Inflation has been a growing problem and there are signs of a real-estate bubble forming. All throughout China’s rise, political stability has been bought by economic growth. Any retardation in the rate of growth, and the tacit social-economic contract between the Chinese government and its people, a collection of distinct ethnic and cultural factions, begins to fray. If this happens, Chinese society may follow suit, fragmenting along historical lines. Moreover, the country faces serious socio-economic challenges as the value of its currency rises, reducing the competitiveness of its exports, and as it transitions from an economy based on state-financed capital investments to a more traditional consumption-based economy. Both of these scenarios could exacerbate latent ethnic and regional tensions which might result in a political upheaval, something that would obviously pose a serious threat to China’s ascendancy.

None of this is to say that China will not remain influential in the coming years and decades. Its economy will likely continue to grow, though at a slower pace, as will its global footprint. Nor am I suggesting that China is on the brink of collapse. The Communist Party has shown itself to be remarkably durable, keeping the country unified through famines, market reforms, mass urbanization and, recently, the proliferation of information technology. The ability of the Chinese government to keep order should not be underestimated.

However, China, like all countries, faces severe challenges and is not immune to their effects (as the punditry would seem to have us believe). Unfortunately, much of the current analysis about the country is incomplete and mirrors the lazy conventional wisdom of the 1970s and 1980s which, impressed by Japan’s high rate of extensive growth, foresaw the rise of a Japanese super-state that would purportedly come to dwarf the United States.
For all the fanfare back then, starting in the early 1990s, Japan began to stagnate and has been doing so ever since. Faced with a demographic crisis of its own, a highly leveraged economy and political inertia, Japan has yet to break out of its multi-decade long economic coma. When China reaches the tipping point in its population bulge and per-capita growth rate, something similar may well occur. China’s meteoric rise, while astonishing, faces serious road bumps ahead and the country’s transformation into a global superpower is anything but certain. History is not inevitable and the debate surrounding China should be a real one, not simply a mechanism for projecting current frustration with the American political or economic system.

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