China Misconceptions

by Pejman Yousefzadeh on October 3, 2011

Daniel Blumenthal takes on “unicorns”–fantastical beliefs–relating to China policy. By all means, read the whole thing, but the following passage is one I want to highlight, since I have covered the perceptions and reality of Chinese power in the past:

. . . China will inevitably overtake the U.S. and we must manage our decline elegantly. This is a new China policy unicorn. Until a few years ago, most analysts were certain there was no need to worry about China. The new intellectual fad tells us there is nothing we can do about China. Its rise and our decline are inevitable. But inevitability in international affairs should remain the preserve of rigid ideological theorists who still cannot explain why a unified Europe has not posed a problem for the United States, why post-war Japan never really challenged U.S. primacy, or why the rising United States and the declining Britain have not gone to war since 1812. The fact is China has tremendous, seemingly insurmountable problems. It has badly misallocated its capital thanks to a distorted financial system characterized by capital controls and a non-market based currency. It may have a debt to GDP ratio as high as 80 percent thanks again to a badly distorted economy. And it has created a demographic nightmare with a shrinking productive population, senior tsunami, and millions of males who will be unmarriageable (see the pioneering work of my colleague Nick Eberstadt).

The United States also has big problems. But we are debating them vigorously, know what they are and are now looking to elect the leaders to fix them. China’s political structure does not yet allow for fixing big problems.

[. . .]

China is our banker. We cannot anger our banker. In fact, China is more like a depositor. It deposits money in U.S. treasuries because its economy does not allow investors to put it elsewhere. There is nothing else it can do with its surpluses unless it changes its financial system radically (see above). It makes a pittance on its deposits. If the U.S. starts to bring down its debts and deficits China will have even fewer options. China is desperate for U.S. investment, U.S. treasuries, and the U.S. market. The balance of leverage leans towards the United States.

[. . .]

Our greatest challenge is managing China’s rise. Actually, our greatest challenge will probably be managing China’s long decline. Unless it enacts substantial reforms, China’s growth model may sputter out soon. There is little if nothing it can do about its demographic disaster (will it enact pro-immigration policy?). And its political system is too risk averse and calcified to make any real reforms.

Of course, there is the following to bear in mind as well:

. . . China’s decline will make our lives easier. China’s decline may make the challenge for the United States more difficult for at least a generation. It could play out for a long time even as China grows more aggressive with more lethal weaponry (e.g., what to do with surplus males?). Arguably both Germany and Imperial Japan declined beginning after World War I and continuing through the disaster of World War II. Russia is in decline by all useful metrics. Even so, it invaded a neighbor not too long ago. A declining, nuclear-armed nation with a powerful military can be more problematic than a rising, confident nation.

We very much need a coherent China policy–one that actually takes account of the facts on the ground. Too bad we don’t have one yet.

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