Chinese economic growth has relied heavily in recent years on fixed asset investment in roads, rails, bridges, and airports, among other things. To finance these projects, many local governments took out bank loans, creating an enormous local government debt burden that many projects will never be able to cover. If China’s growth slows, non-performing loans could quickly become a major problem. In turn, the diversion of state financial assets to resolve bad debt problems would exact opportunity costs by keeping the money from being used for more productive purposes.
There are also important questions about the sustainability and future challenges of rapid infrastructure build-out, relating to quality, long-term maintenance costs and future hidden costs of correcting infrastructure decisions made rapidly or for the wrong reasons. With proper supervision, Chinese construction firms can build world-class infrastructure at competitive prices. However, in practice, the potent cocktail of politically-induced time pressure, corruption, and a safety culture that remains lax for a country with China’s aspirations have combined to yield an infrastructure base that far too often literally kills. Examples in recent years include the increased death toll in the 2008 Sichuan earthquake due to shoddy buildings constructed by corrupt contractors who cut corners and the July 2011 Wenzhou train crash, which killed 40 people when lightning allegedly stopped a bullet train that was then rear ended by another.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Certain types of infrastructure are inherently dangerous, and even countries with very strong safety cultures can experience major problems, as Japan has with its Fukushima nuclear power plants. However, China’s ‘get it done as fast as possible’ infrastructure build-out mentality raises particular concerns as the country looks to develop complex and potentially dangerous projects in coming years, including more than 26 nuclear reactors that are currently under construction.
In the business sector, China also faces significant challenges to moving away from a primarily sub-contractor model to progress up the value chain. Beijing wants to build its long-term economic development strategy around quality, innovation and branding, but to achieve this there must be better intellectual property protection, a greater degree of openness for ideas and innovation to arise and prioritization of reliability and originality. China’s domestic heavy equipment sector clearly shows how powerful branding is, with Caterpillar, John Deere and other foreign vendors able to charge much higher prices for comparable equipment than can most domestic manufacturers. Brand building within China is likely to depend heavily on how well the business law and intellectual property regimes can protect innovations from the rampant and rapid copying that currently makes it difficult for innovative Chinese firms to recoup their product development costs and fully enjoy the economic value of their product and re-invest in new developments.
Securing China’s Place
Internal security, such as dealing with the as many as 180,000 ‘mass incidents’ that took place in 2010, demands vast resources in manpower and surveillance technology. China’s military modernization likewise depends heavily on the state of the economy. Strong increases in spending will be essential for China to secure the role it desires as East Asia’s most powerful non-US military force. To truly displace the United States from the region and become a more globally-capable power, even larger spending increases would be needed. China’s rise as a key global economic and security player depends critically on its economy and the trajectory of its power moving forward is likely to hinge heavily on the country’s economic growth path.
In the longer term, a variety of factors may limit People’s Liberation Army budget growth, at least to some extent. Various structural factors including higher health care and pension costs and rapidly rising wages that will erode the Chinese defence industry’s labour cost advantages could greatly restrict China’s ability to sustain rapid military spending growth, regardless of its leaders’ intentions. Personnel, equipment, and operational costs are all rising for the PLA, and there will be a limit to what can be afforded in the future. In coming years, China’s leaders are likely to face wrenching tradeoffs as China’s population ages, develops increased lifestyle expectations, and remains strongly nationalistic.
Even at a lower level of defence spending, China could still increase its power and influence substantially in East Asia and perhaps challenge US and allied interests there substantially. But the nature of the challenge could be very different depending on how Beijing chooses to allocate its resources along a continuum of focus from domestic security to regional dominance.
All this means thatChina’s rise could be slowed, complicated, or even threatened in critical aspects by a failure to deal with the political, economic, demographic and security challenges it faces. Potential challenges include water and resources shortages, environmental devastation, ethnic and religious discord, income and urban-rural inequality, enduring corruption, social unrest and political transition.
Such setbacks could be particularly dangerous for the Communist Party given popular expectations of rising living standards and foreign treatment of China being based in part on its perceived future potential. Substantial economic and even political reforms—at least increased rule of law, political pluralism, and freedom of expression—may be needed to address the needs of Chinese society in the future.
On the strategic front, slower growth and rising costs from internal challenges could crimp China’s ability to spend on military modernization. This could substantially curtail the country’s ability to become a major naval and air power outside of its immediate neighbourhood.
As for the S-Curve dynamic and what can be done about it, Beijing’s leaders will surely state that they retain control. China enjoys the advantages of relatively high government policymaking coherence, and a large population with an enterprising spirit that values education and has a tremendous work ethic. But the challenges China faces aren’t easily overcome, and how it tries to do so will have implications for us all.
Andrew Erickson is an associate professor at the US Naval War College and fellow in the Princeton-Harvard China and the World Programme. Gabe Collins is a commodity and security specialist focused on China and Russia. This is an edited and abridged version of a longer analysis. The full version can be read here.