How a toxic mix of economic, demographic, environmental, political, and international challenges could end China's ascent.
If dating the rise and decline of great powers is tricky, pinpointing the peaking of a rising power is almost hopeless. One obvious problem is the measurement of power. Shall we look at the size of a country's economy or its level of wealth? Should we also consider the momentum and sustainability of its growth? Is its external environment a legitimate variable to include in calculating its power since any country's power is relative to that of its potential adversaries?
These are the questions to bear in mind when we tackle an important real-world problem: Has China's rise peaked?
If one were to pose this question a few years ago, he would probably be laughed out of the room. The conventional wisdom then was that China's rise was certain to continue. But today, this question is very much on everyone's mind.
What has changed?
If one has to take a position, it may be reasonable to argue that the Beijing Olympics in 2008 symbolically marked the peaking of Chinese power. Everything began to go downhill afterwards. Caught up in the global economic crisis, the Chinese economy has never fully recovered its momentum. To be sure, Beijing's stimulus package of 2008-2009, fueled by deficit spending and a proliferation of credit, managed to avoid a recession and produce one more year of double-digit growth in 2010. For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved. Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth. The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.
Short-term difficulties are not the least of Beijing's worries. In the coming decade, many of the favorable structural factors that have helped power China's double-digit growth in the past two decades are going to disappear. Topping the list is the demographics. The proportion of the Chinese population of working age peaked in 2011 and has started decreasing in 2012, according to a RAND study. At the same time, the share of the elderly in the population is beginning to rise rapidly. In 2010, 8.6 percent of the population was 65 and older. By 2025, the figure will likely be 14.3 percent. An aging population will increase labor costs, reduce savings and investments, inflate healthcare and pension costs — and slow down growth.
Another difficult obstacle ahead is environmental degradation. Beijing has neglected environmental protection for the sake of rapid growth. But the costs of environmental degradation have become unbearable, both economically and politically. Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP. China's long-suffering population has finally begun to fight vigorously for their environmental rights. This year alone, large-scale protests forced the government to cancel plans to build plants that would threaten the health and livelihoods of the residents in two Chinese cities. In the decade ahead, the combination of environmental degradation and the effects of global warming will further drag down Chinese growth.
The most serious long-term obstacle to Chinese growth is its state capitalist system. In the last decade, Beijing has largely reversed pro-market reforms and embarked on a decidedly statist developmental path. Consequently, state-owned enterprises have gained enormous clout in the economy and enjoy monopolistic privileges. The financial system favors such firms at the expense of private entrepreneurs. Household income, at 43 percent of GDP, is too low to support a higher level of consumption, a critical factor in rebalancing the Chinese economy and providing a source of future growth. Without systemic reforms, according to an influential World Bank study, growth in the coming two decades will fall well below 7 percent per annum. But reforming state capitalism is almost impossible politically because that will undermine the very foundations of the Communist Party's rule.
On the political front, the coming decade will likely be one of rising opposition against the party's political monopoly. Chinese citizens have become far more outspoken and willing to contest the party's authority. Despite the regime's huge investments in censorship, it now even concedes that the Internet has given ordinary Chinese people a powerful collective voice in shaping public opinion. Government policies across a wide range of issues, such as the one-child policy, budget transparency, education and healthcare policies, are being challenged for their reasonableness and legitimacy. Behind these developments is a fundamental crisis of legitimacy of the current regime.
As for the ruling elites, their unity can no longer be taken for granted. The Bo Xilai Affair has revealed the rift at the very top of the regime. Worse still, a sense of political malaise and loss of direction today pervades the party. Many of the party's best and brightest now realize that the regime's best days are probably behind it and, without fundamental political reforms, it will not be able to hold on much longer.
Externally, China's benign external environment is beginning to deteriorate. Its relations with many of its neighbors have become far more contentious due to territorial disputes. China's major trading partners have lost patience with its mercantilist policies. The all-important Sino-American relationship is growing more competitive. The fundamental fissures in this relationship have widened because of ideological conflict, geopolitical rivalry, and strategic distrust. As countries around the world, for their own reasons, raise their vigilance against Chinese influence and start to push back, Beijing no longer enjoys a free hand in expanding its economic foothold and securing access to markets and resources.
What this analysis reveals is that the growth of Chinese power under one-party rule has peaked. The seductive authoritarian state-capitalist development model may have delivered an economic miracle in the post-Tiananmen era, but for all practical purposes this model has lost its magic, if it has not gone totally bankrupt. However, China's future does not have to be a dismal one. The obverse of this analysis is that, with the right reforms, particularly a return to a pro-market growth strategy and a transition to democratic rule, China can comfortably confront these domestic and external challenges. A more liberal market-based economic system will utilize resources more efficiently and equitably than state-capitalism. Democratic reforms will give the regime a fundamental source of political legitimacy at home and also help reduce animosity and distrust of China abroad. China will have an excellent chance to lay the economic and political foundations for a 21st-century superpower. If this were to occur, China's best days would still be ahead, not behind.
Photo Credit: Wikicommons