The
received wisdom these days is that the West is in rapid decline, and China is
on an upward trajectory that cannot be stopped. Sooner or later the pundits
say, the two lines will cross-- perhaps explosively-- and China will rule the
world.
The latest evidence? Klaus Regling heading to
Beijing on Friday to beg for Chinese financial aid to rescue Europe. It is
certainly a long way from the foreign treaty ports and other indignities that
China suffered at European hands in the last century... I wonder if there is a
Chinese word for schadenfreude?
I might have contributed modestly to the
momentum theory of China's ascendancy myself with the 2003 article that David
Hale and I wrote for Foreign Affairs, China Takes Off. To say that China is
rising is one thing however, because that is undoubtedly true. To say that
China will rule the world is quite another.
An amazing number of Americans who were polled
recently incorrectly believe that China's economy is already bigger than the
US. The view from inside China is somewhat different. As any thoughtful person
there will attest, China faces a slew of obstacles at this stage of its
development. China might be a rich state, but its people remain poor. China may
become the world's largest economy in 2016 according to optimistic estimates by
the IMF, but that simply means that total output will be larger than in the US.
A country with 1.3 billion people should have an economy larger than one with
.3 billion in absolute numbers: China's population is more than four times
larger. If both economies were exactly the same size, China's GDP per capita
would be just 25% compared to the US.
What this means is that in spite of the
overall size of its economy, the standard of living in China is correspondingly
lower. Just one example to put this into perspective: only 20% of Chinese
people have flush toilets. The inescapable fact is that a world in which
Chinese consume at the same rate as Americans is a world that cannot exist,
based upon available resources of food, water, energy, and other commodities
and products such as cars. It would require by some estimates four plant
Earths. There is a natural limit to Chinese consumption simply because there
are so many Chinese people. This might be unfair, but it means that the great
majority of Chinese will not be able to enjoy the kind of life we live here in
the US absent exponential and unforeseen technological progress.
Demographics play a crucial role in terms of
limiting Chinese growth and economic prosperity. China's population, similarly
to Japan, is getting older. The difference is that the Chinese are not going to
be as rich as the Japanese by the time that much of their population is over
the age of 65. By 2040, assuming current demographic trends continue, there
will be about 400 million Chinese elderly with fewer descendants to take care
of them than in previous generations. According to a report by CSIS, The
Graying of the Middle Kingdom instead of the current ratio of 6:1 working
adults to elder dependents, by the middle of this century there will only be
about 1.6 working adults for each elder. Due to the lack of job-related and
government pension funding the end result will be that China's savings, upon
which her wealth has been built, will erode. China faces a steady decline in
its workforce beginning mid this decade, thanks to the One Child Policy.
The elderly are also major consumers of health
care services. The United States is the richest nation on earth, and has
positive population growth, but we are still worried about being able to take
care of our baby boomers in the future. In today's China, healthcare is at a
premium, and many people in the countryside cannot afford any medical treatment--
full stop.
According to a recent article in Foreign
Affairs by Yanzhong Huang, The Sick Man of Asia, China's Health Crisis in 2006
80% of China's health care expenditures were funneled into the treatment of
only 8.5 million government officials. Another amazing statistic Huang cites:
more than 73% of Chinese hospitals have reported violent incidents between
patients and healthcare professionals. Why? Because feelings run high when you
are told that your child, your parent or your spouse cannot be given treatment
because you cannot pay for it. China is worried about getting both old and
sick: by 2040, more Chinese will be suffering from Alzheimer's than the total
populations of all the developed nations combined.
Health care is not the only area of concern.
The Chinese government is aware that there is growing resentment of income
inequality, the result of the introduction of capitalism and the wholesale
abandonment of its social safety net. When I first went to China in 1979, the
so-called Gini coefficient, the measurement of income inequality, was low.
China was a truly socialist country and all services including housing were
provided by the state. China in 2011, nominally and in fact politically still a
communist country, has greater income inequality than the US.
Someday China's 99% could be a truly potent
force. China's leaders are worried about organized protests. There is no
Twitter in China, as I recently confirmed with the co-founder of Twitter, Biz
Stone. Facebook does not function, and the Internet and all online news is
censored. Chinese citizens will increasingly face an asymmetric information gap
as they struggle to compete with other large developing countries such as
India, which allow the free flow of information. This is not an environment in
which innovation can flourish. Try to imagine a Chinese Steve Jobs--almost all
of the new companies in China today are derivative of US products, services,
and business models.
Examples of the limits of technological
progress in the face of suppression of information can be seen in recent
accidents involving China's showcase technology. The bullet train tragedy, the
grounding of the new Airbus made in China, and similar events add up to an
enormous glitch factor as China attempts to step up the technology ladder to
more complex systems. Overheard comment--an inspector on the Shanghai's vaunted
subway system will not allow his family to use their trains. Whenever there is
an atmosphere of fear, bad news does not get reported up the command chain.
Other countries are increasingly less willing
to share their technology with China for a variety of reasons. Some
businesspeople have had bad experiences, either in terms of political pressure
(Google) or more commonly, theft of intellectual property. Lack of protection
by China's legal system is cited as the number one structural impediment to
foreign companies doing business in China. This all goes back to the ideal of
creating an atmosphere in which ideas can flourish and R&D spending is
rewarded through the stock market and other vehicles, a process that is not
taking place in China today.
Small business, the cradle of job creation
everywhere, is at a lending standstill in China. Most small and medium size
businesses are forced to go to the black or "informal" lending
markets for funding, with interest rates of 20, 30 and 40%. Chinese banks are
equipped to funnel loans to the large state-owned businesses, but they do not
have credit analysts who can determine whether or not a business should be
given a loan on its own merits. The languishing stock market is still dominated
by behemoth state-owned enterprises, so when startups need capital, they often
turn to foreign investors. In spite of the glut of savings within China's
banking system, all of China's major Internet firms raised funds in US stock
markets--Sina, Sohu, Alibaba. Lack of access to capital has also resulted in
the loss of thousands of Chinese engineers and entrepreneurs who decided to
come to the US to start their businesses, to the inestimable gain of Silicon
Valley.
Another common misperception is that China
will overcome the US militarily. First of all, China has no major allies, with
the possible exception of Russia, which clearly seeks to protect its own
interests first and foremost. The US on the other hand has firm global allies,
military bases worldwide, and a navy that girdles the earth. Secondly, in
today's world, warfare is all about technology, and in spite of its successes
with rockets and satellites, China is still handicapped in this area. Finally,
there is the question of political will. China will fight to protect its
interests in Taiwan and in Tibet. But other than that, North Korea has proved
to be a major albatross, and there is another strong power in the region,
Japan, which will do everything it can to check China's military ascendency.
All of this is not to say that China isn't the
greatest success story of our generation. It is a land and a people I love
dearly, a civilization whose history and art are unparalleled in many respects.
But there is no predetermined place for China to regain on the world
stage--history is that simple. When you next read about the "end of
America" or China's "inevitable" domination, put on your
skeptical spectacles. In spite of the visible, flashy wealth of its modern
coastal cities, China is still very much a developing economy on the brink of
major changes. Its current system of centralized non-democratic government
might be perfect for implementing unpopular choices such as joining the WTO, a
decision that was estimated to cost 50 million jobs at the time. The question
is whether China has been able to use its wealth it has gained since joining
the WTO to create institutions that can bring longer-term stability.
As China is transitioning to become a full
member of the world community from which it was entirely separated just forty
years ago, we have perhaps seen the end of Chinese rather than American
exceptionalism. The characteristics that allowed China to make enormous
progress to date are not necessarily the qualities that will be needed to
create productive global integration going forward. China is already our
greatest commercial partner, and the US should do everything it can to
encourage China's engagement, including eschewing trade barriers of all kinds.
Overly optimistic misinformation about the realities China faces can lead to
poor decision-making by our own government officials. The bottom line is that
we should not fear a strong China. Rather, we should fear a weak China.
What are the steps China should take? It
should implement a path to full convertibility of its currency and open capital
accounts, end financial repression, promote income equality and access to
social services, allow the free flow of capital and information across and
within its borders, promote freedom of expression-- all these changes and more
need to be executed carefully and with all deliberate speed. With a leadership
transition looming, the Chinese ship of state now requires a captain who
recognizes that China's future depends on integration rather than
exceptionalism.
I believe that being China's leader at this
time in history just might be the toughest job on earth.
Lyric Hughes Hale
Business & Investment Opportunities
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