One quick, simplistic way to compare China and the United States: China has a wealthy state and a poor society, while America has a poor government but a wealthy society. The Chinese government can fund grandiose projects such as high-speed rail lines, the “New Silk Road” and the Asia Infrastructure Investment Bank, while the U.S. federal and state governments struggle to keep their country running on an aging and in some places crumbling infrastructure. Yet the average American enjoys a considerably higher standard of living than the average Chinese. The USA’s stock of private wealth is estimated at about $85 trillion, while China’s is far smaller at a little over $20 trillion.
Some analysts argue this huge gap in private wealth ensures that China is not poised to overtake the United States as the world’s top economic power and therefore China is not a threat to American global pre-eminence in the foreseeable future. This analysis, however, is flawed.
The figures indicating a massive American advantage over China in private wealth are somewhat ephemeral. The total value of real estate in China may have already surpassed the total value of American real estate. Much of this gap in private wealth, then, would rely on the current value of stocks and bonds owned by American investors. We know from recent experience how quickly this paper wealth can disappear. This unstable form of wealth is much more prevalent on the U.S. side than it is on the Chinese side. Over half of American households own stocks, while fewer than 10 percent of Chinese households do.
Massive printing of currency by the U.S. federal government during the last financial crisis inflated stock prices and to some extent also increased the value of American homes. In contrast, the Chinese government’s economic stimulus program employed debt financing to build, in part, infrastructure that will increase China’s long-term productive capacity – a tangible gain in national strength.
Finally, the assessment of U.S. private wealth gets a boost from the unique privilege America enjoys as the dominant supplier of the world’s reserve currency. The greenback remains mostly unchallenged in this position. But the United States’ “exorbitant privilege” is not assured. The dollar’s status is already questioned and likely to give way to alternative currencies, such as the Chinese yuan. This could decrease U.S. international purchasing power substantially, while that of China would increase. As the example of the Japanese yen’s rapid appreciation in the 1980s illustrates, the U.S.-China wealth gap could quickly evaporate as a result of this shift.
When it comes to global leadership, two things matter. The first is technological innovation. The second is strategic leverage, most importantly through the ability to project military power. In both of these areas, the gap in private wealth neither secures America’s top-ranking position nor prevents China from catching up.
A country’s capacity to generate and benefit from technological breakthroughs and advanced production techniques is one of the primary sources of its national strength. China has not equaled the United States in leading-edge sectors such as more efficient batteries, solar energy panels, biotechnology, aeronautics, nanotechnology and robotics, but the Chinese are catching up. The outlook for continued rapid Chinese progress is good because many of the scientists working in the United States in STEM research (science, technology, engineering and mathematics) are Chinese and innovation systems are increasingly global in nature.
International politics is a competition among state governments, not among societies. Private wealth is not immediately convertible into instruments of national power, such as military capability. Private wealth is easily lost or dissipated. Rich individuals can take their wealth out of their home country or transfer it by buying foreign products. No number of luxurious homes with nice cars parked in the driveways will guarantee national power if that country’s government is cutting back on investments in infrastructure, basic research and advanced weapons systems.
Conversely, the government of a poorer society that puts its limited national treasure toward military strength can be disproportionately influential. A smaller competitor with purposeful, coherent, and long-term strategic planning can outmaneuver an initially larger but floundering rival. A state with a large treasury and other assets at its disposal, plus a relatively low level of direct accountability to its population for how it employs those assets, has an advantage over a state with a budget crunch and a needy population that wields the power to throw elected officials out of office.
The coherence and efficiency of the Chinese Communist Party’s nation-building program is often exaggerated. China faces many huge economic, political and social challenges, and the Xi Jinping government is not making this path any easier by antagonizing some of China’s neighbors. But let’s be clear that those big screen TVs in America’s living rooms will not guarantee U.S. security, and even less superpower status. If the U.S. government acts like the notorious Roman Emperor Nero, it might get similar results.
Christopher A. McNally is a Professor of Political Economy at Chaminade University and Nonresident Fellow at the East-West Center in Honolulu. Denny Roy is a Senior Fellow at the East-West Center.