Why Don't I Believe Predictions of a New Chinese Century?

by Pejman Yousefzadeh on October 3, 2010

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Because I read articles like this one, and benefit from knowing better than to buy into the conventional wisdom concerning the supposed rise of China:

This year, China overtook Japan as the world’s second-largest economy, a shift in the global pecking order that surprised nobody who has been paying attention for the past 20 years.

What was truly surprising is that Japan was still No. 2. Like a distant uncle whose death notice reminds you he was alive, Japan is noteworthy for its furtive slinking from the world stage. It is an extraordinary disappearing act for a country whose global hegemony was seen as a fait accompli just 20 years ago. But the ur-Asian-export juggernaut has slipped into a permafunk of its own making.Japan as Number One now languishes as the 400,000th most popular book on Amazon.com while When China Rules the World is a bestseller.

The funny thing is that China borrowed much of its economic model from Japan: producing low-cost exports to fund investment at home while aggravating trading partners. At times, it seems like only the names have changed. Where Detroit automakers once denounced Honda and Toyota for dumping cheap, fuel-efficient sedans on American housewives, Treasury secretaries now wring their hands about the undervalued renminbi while China’s trade surpluses yawn.

As pleasurable as it must be for China’s leaders to have beaten Japan at its own game, the joke might soon be on them. In fact, they would do well to veer off of Japan’s development path promptly. Sure, Japan’s export boom funded stellar growth for four decades. But its undervalued currency eventually helped blow one of the largest bubbles in history, the bursting of which still hobbles Japan today. Japan’s famously dismal demographics didn’t help, but China’s aren’t much better. Beijing’s one-child policy, introduced in 1979, has worked its way up the population pyramid such that China’s supply of rural workers ages 20 to 29 will halve by 2030. Worse yet, China is much larger than Japan — which means that the global consequences of a crash would be far greater. For the moment, Beijing is riding high, but China’s sustained success depends on understanding where Japan went so badly wrong.

[. . .]

China is far more dependent on exports and investment than Japan ever was, and the numbers are still moving in the wrong direction. Investment accounts for half of China’s economy while consumption is only 36 percent of GDP — the lowest in the world, drastically lower than even other emerging economies such as India and Brazil. But as the Japan example illustrates, low consumption leads to high savings, and China’s thrifty citizens, coupled with booming net exports, have bestowed upon the country the world’s largest current account surplus, triple that of Japan’s in 1985.

Much has been made of China’s trade surpluses, and it is easy to get lost in the numbers. At times like these it is important to remember just how large China is — and that in terms of global economic impact, it is only getting started. With GDP per capita only one-tenth that of the United States, China is already the second-largest economy in the world. Chinese infrastructure spending moves global commodity markets, and many basic materials set record prices over the last few years thanks to China’s nation-building efforts. With steel capacity per capita only half of Japan’s 1974 peak, China can already produce more steel than the United States, Europe, Japan, and Russia combined. In addition to its investment boom, persistent Chinese net exports and current account surpluses also generate significant global financial imbalances. In 1988, Japan’s foreign exchange reserves stood at 5 percent of Japanese GDP and 0.7 percent of global GDP, whereas China’s are now half of Chinese GDP and a full 5 percent of global GDP. Reserves of this magnitude have the potential to destabilize the Chinese and global economies.

[. . .]

. . .

China’s one-child policy produced a large demographic dividend in the 1980s and 1990s as those of working age had fewer dependants to support. Starting in 2015, however, China will suffer the inverse — a growing number of aged relying on a shrinking pool of young workers. “China has always been a demographic early achiever,” quips a recent U.N. population report.

When China’s working-age population peaks in 2015, it will be 20 years after Japan’s crested the wave, but it will do so at a much lower level of prosperity than was Japan’s at that time. The harsh reality is this: Japan got rich before it grew old, and China will grow old before it gets rich.

Obviously, it would not be a good thing if China’s economy suddenly started cratering. But there are reasons why I believe that the United States–despite its various fiscal and economic problems–will continuing setting the economic pace for many decades to come. This article only encapsulates some of them.

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