8/8/2019 China - Uncertain Leap Forward

http://slidepdf.com/reader/full/china-uncertain-leap-forward 1/2

tHE COMPREHENSIVE REFORMS UNLEASHED BY  DENG XIAOPING IN

1978 set China off on an explosive path to become America’s

main geopolitical rival, the world’s second largest economy, its

 biggest exporter and its major creditor with over three trillion

dollars of foreign financial assets, or the equivalent of three

quarters of its gross domestic product (GDP).

By 2030, on current form, China’s GDP will overtake the US, possibly a bit

earlier. Income per head of population, which has trebled in thirty years to

PAGE 7

A P P H O T O / G R E G B A K E R

THEWORLDTODAY.ORG DECEMBER 2010

UncertainLeapForward

CHINA George Magnus, SENIOR ECONOMIC ADVISER, UBS INVESTMENT BANK AND AUTHOR, ‘UPRISING: WILL EMERGING

MARKETS SHAPE OR SHAKE THE WORLD ECONOMY?’ JOHN WILEY 2010, WILL BE SPEAKING AT CHATHAM HOUSE ON DECEMBER 14

Is this the Chinese century, and will Beijing again dominate the global system

as it did from before the birth of Christ to roughly 1800? These weighty 

questions have received additional impetus in the wake of the devastating

financial crisis and its tough and protracted consequences for the United

States and other western nations. The contrast with an economically and

increasingly politically self-confident China could hardly be more stark.

 Yet, global futures cannot be projected in the linear and apolitical form,

 which many employ. There are serious challenges ahead for China.

8/8/2019 China - Uncertain Leap Forward

http://slidepdf.com/reader/full/china-uncertain-leap-forward 2/2

about $3,700, could reach $13,000. With the west in post-

crisis economic and political disarray, China’s enormous

impact is very clear nowadays on neighbours and the world

system. What could possibly go wrong in the increasingly 

common refrain that the future belongs to China?

To answer this question requires impossible foresight. But we should consign linear thinking to spreadsheets, and try to

understand the consequences and flashpoints resulting from

economic and political processes. From a fairly long list of 

 topics, five seem to stand out:

Ageing FastestFirst, China is an emerging market oddity in demographic

 terms. It is not the oldest, but it is the fastest ageing countryon

earth, and by2050 it will be older thanthe USon every major

demographic measurement. From now on, China’s youth and

 working age populations are going to fall, and those over 65

 will soar. Put another way, there will only be 2.5 workers to

supporteach older citizen, compared with ten today.

The one-child policy is an important, though not the

only, factor contributing to this enormous demographic

  transition. The consequences include slower economic

expansion, and growing social problems as a result of 

chronic gender imbalance. Many wonder whether China 

 will grow old before it gets rich.

To avoid such an outcome, China will simply have to get

richer more quickly, but this entails a significant shift in the

sources of economic growth – and vested political interests –

from companies to consumers, and from coastal provinces to

hinterland and rural areas.

Innovation Culture

Second, the demographic transition makes it even moreimportant to sustainhigh levels of technological achievement.

China is a big fish already in the information, low carbon,

clean air, and automotive technologies. Among local ‘winners’

are Baidu, the local Internet search engine with eight hundred

million subscribers, Alibaba, the privately owned e-commerce

on line retail and cloud computing service, Geely Holdings,

 which bought Volvo, and Huawei Technologies, the country’s

 largest network and telecommunications equipment supplier.

Nevertheless, using and developing modern technologies is

not thesameas having a deeply rooted culture ofinnovation and

entrepreneurial transformation. You can certainly create world

 leadership in the production of screen-based goods and green

energy products and processes along the Yangtse Delta, but thisis not the equivalent of a Silicon Valley, which thrives on

adversarial conflict in innovation, proprietary ownership of 

processes, patents and copyrights, and the absence of hierarchy 

and political interference.

Rights And LawThird, China’s soft underbelly historically has been the

relativeweakness of its institutions and their abilityto nurture

and promote change. Perhaps size matters here. It is a lot

harder to govern a large civilisationwithout a controlling, and

sometimes repressing bureaucracy than it is a nation state.

But the country’s legal, social and other Communist Party-

subservient institutions will be put to the test by the enormity 

of the economic restructuring ahead.

In a nutshell, the issue is about whether the Partyis willing

and able to give citizens political, as well as economic, rights,

and whether in today’s rapidly modernising economy, rule by   law can substitute for rule of law without thwarting or

distorting economic development.

Risk of a BustFourth, the government’s legitimacy rests on a sort of 

informal social contract based on the continuous delivery of 

eight to nine percent economicgrowth. But a slowdown could

occurfor a variety ofreasons over thenext decade and beyond.

These include the demographic transition; the exhaustion of 

past achievements, such as high literacy and school

enrolments; high prices for food and raw materials as a result

of the country’s voracious demand; environmental

constraints; and, more immediately, the growing risk of a 

property and asset bubble produced by excessively loose

exchange rate, monetary and credit policies. This is not to

argue that Beijing faces a bust any time soon, but that if it

keepstreadingthe current path,then therisk will surely grow.

Global TensionsFifth, China’s increasing status as a world power is already 

generating global tensions. When a Chinese craft recently 

rammed a Japanese fishing boat off the disputed Senkaku

islands, the Japanese Foreign Minister wondered whether we

arenow startingto seethe ‘essence of China’.

Japan andseveralother countries have been concerned about

China’s behaviour in embargoing so-called rare earth metals,

used in high technology products, and over whichit has a virtualmonopoly. India has been vocal about Beijing’s economic and

political activities in Asiaat what it regards as itsexpense.

China’s maritime build-up in Asia has the United States

and regional allies on alert. Its reconstruction of a 

commercial-political Silk Road into the Middle East and

 Africa, and even LatinAmerica, may be less colonial and more

driven by the need to secure access to crucial resources. But

for many it is sometimes hard to tell the difference.

These geo-political tensions are liable to get in the way of 

high levels of international economic cooperation and

mutually beneficial policies. In the last two years, increasing

 trade protectionism has been one of the consequences, and

more recently, currency wars, restraints over the movement of capital, and blatant acts of corporate protectionism.

If theG20 group of developed and emergingcountries,but

especially the G2 nations, America and China, are unable to

reverse this tide and establish a proper framework to address

 their contrasting interests, no one would be a winner. But the

economic and political consequences for China would come

as a rude shock to theconsensus.

In 2012, China will change its leaders, and US voters will

have the opportunity to do the same. The challenges faced by 

  the world’s largest creditor and debtor nations,

separately and together, are equally significant.

THEWORLDTODAY.ORG DECEMBER 2010

PAGE8