Pacific Money

China’s Economy: Don’t Bet on Beijing

A recent report makes clear the enormous challenges facing China’s economy.

The Financial Times recently reported that China has wasted nearly $7 trillion since the global financial crisis. According to research by China’s state planning agency, the National Development and Reform Commission, “ineffective investment” made up nearly half the total amount invested in the Chinese economy since 2009. The soaring ranks of empty skyscrapers and residential complexes that crowd the skylines of so many of China’s third- and fourth-tier cities are the most obvious sign of this prodigality, although alongside extraordinary levels of misallocated capital, billions of dollars of post-crisis stimulus has simply disappeared into the opaque pockets of Communist Party officials. Following the widely hailed conclusion of the Asia-Pacific Economic Cooperation forum earlier this month in Beijing, where Chinese President Xi Jinping insisted once again on a “new type of great-power relations” between the United States and a rising China, these reports of waste on an immense scale should be a salutary reminder of the extent of the challenges the Chinese Communist Party faces before any supposedly inevitable transition of global power takes place.

As chronic American declinists and bullish Chinese analysts never cease to point out, China is certain to overtake the U.S. as the world’s largest economy at some point in the near future, having become the largest trading nation in 2013. Three decades of near double-digit growth in China, coupled with American fiscal indiscipline and political dysfunction, have made betting on a coming “Chinese century” a popular option. This confidence is based in large part on the assumption that GDP correlates closely with national power, an assumption that only partially stands up to scrutiny. After all, China was the largest economy in the world (at least in purchasing power parity terms) throughout much of its “century of humiliation,” when British and French warships periodically bombarded Chinese ports and sacked its Imperial Palaces with impunity, and when Japanese armies occupied vast swathes of Imperial land. Thus GDP alone, on which so much of the case for the rise of China as a challenger to American hegemony rests, is an insufficient indicator of trends in national power. At least as important is wealth in per capita income. And on this measure, America remains utterly dominant. According to the World Bank, U.S. GDP per capita is at least $45,000 more than Chinese GDP per capita, and in absolute terms the gap has in fact widened over the last two decades. Needless to say, this trend runs very much counter to declinist predictions.

Of course, there are numerous other reasons for caution in “betting on China.” Its demographic trends are well-known: China will soon face the most abrupt aging crisis in human history, as the consequences of the one-child policy play out. On current forecasts, the ratio of workers per retiree will collapse from 8 to 1 today to 2 to 1 by 2040. A less familiar demographic trend also emerging from the one-child policy is the growing number of young men who will never marry, the consequence of decades of sex-selective abortion that has contributed to a reported birth ratio of 118 boys for every 100 girls. These trends will between them have significant social, cultural, and fiscal implications. And as for the prospects for continued high growth rates in the short- to medium-term, China is on track this year to grow at its slowest annual rate since 1990. For all the talk of American indebtedness, China’s credit-to-GDP ratio has risen by 58 percent since the start of 2009, driven above all by a debt-fuelled housing boom. China’s economic juggernaut will face real challenges in the next decade.

Of course, many have predicted the bursting of China’s bubble before, and have been proven wrong. The Chinese Politburo is more resourceful than its critics give it credit for, and well aware in its upper echelons of the need for certain vital reforms. The speed of China’s industrialization is unique, and with no real historical precedents it is very hard to predict how it will unfold. Nonetheless, the least plausible scenario is that China, guided serenely by the calm wisdom of the ruling party, takes its place in the ranks of the fully developed nations, and even at the very top tier alongside the U.S., without at least one serious economic or political setback. And as for America’s supposedly inexorable decline, the announcement last week that the Chinese and Russian militaries will cooperate much more closely to counter U.S. influence is a useful reality check. In briefing rooms in Beijing and Moscow, officials are still all too driven by fear of the U.S., the great power whose time, they say, has been and gone.

Sam Winter-Levy is the Von Clemm Fellow at Harvard University, carrying out postgraduate research in international relations and American foreign policy.