An announcement was made last week that received surprisingly little editorial comment given its potential impact: China passed Japan to become the second largest economy in the world based on second quarter GDP and most surely will best Japan for the year. It is an unprecedented accomplishment for a developing economy to surpass a developed economy. Moreover, it took only three decades to achieve it after Deng Xiaoping took the helm following the death of Mao Zedong in 1979 and set course for China to become a market economy.
If present trends continue, the Carnegie Endowment for International Peace predicts that China is on track to equal the US GDP in 2035 and to be twice the US GDP in 2050. That’s a big “if” because present trends have a nasty habit of not continuing. We only have to recall the 1980s when American Henny Pennys were predicting the sky was falling because Japan was taking over leadership of the global economy and America’s only economic salvation was to become more Japanese. Thereafter Japan slipped into a 20-year long recession after a disastrous Obama-like government takeover of its economy, making the average Japanese poorer than the average citizen of Mississippi.
That China would overtake Japan in aggregate output has long been expected. It is inevitable that pundits would then begin speculating on if China will overtake the US and how long will it take. However, recalling the Nipponphobia of 30 years ago, should America expect that it will lose its hegemony as world leader any time soon – if ever? The predictable spate of recent Sinophilic books like Martin Jacques’ 400-page tome extravagantly titled When China Rules the World: The End of the Western World and the Birth of a New Global Order, Reed Hundt’s In the Shadow of China, and Fareed Zakaria’s The Post-American World say yes.
American business leaders know surprisingly little about China, and as Will Rogers once observed about common knowledge, “what they know ain’t so.” For example, it is widely thought that Chinese prisons are full of dissidents, when in fact the Chinese incarceration rate is 119 per 100,000 people against the US rate of 760 per 100,000 – the world’s highest. The mainstream media often reports Chinese persecution of Christians when in fact there are 80 million Christians in China and religious freedom is a constitutionally guaranteed right as it is in the US. There is more economic freedom in China than the US, which is strangling its economy with more taxes, regulations, and government spending. In 30 years, the government share of the Chinese economy shrank to 11% from 31% whereas, since Obama took office two years ago, the US debt-to-GDP ratio has grown from 40% to 63% and is projected by OMB to grow to 90% by 2020.
With 1.3 billion people, China is the world’s most populous country. Therefore its aggregate GDP statistic can be misleading. Per capita GDP is about $1,000 for China, about $10,000 for Japan, and $45,000 for the US. But China’s GDP growth rate has been growing an eye-popping 9% per year for 30 years, doubling its economy every eight years for three decades and moving 400 million people out of poverty. Recent US GDP growth has been 1.6%.
While China exports more in a day today than it did in all of 1978, the year before Deng Xiaoping announced its open market policy, it must begin fueling future growth from its domestic market by employing more people and turning them into middle class consumers. China is the world’s largest holder of money, currently sitting on over US$2 trillion in foreign currency reserves. It can’t hope for an ever-expanding global demand fed by foreign trade deficits and adverse current account balances – particularly when the US and European economies are in a multi-year funk with high unemployment rates.
China’s domestic consumption has fallen from 55% of GDP in the late 1990s to 36% recently. Long-term US domestic consumption has been 70% of GDP. Because China’s capitalism is corporate rather than private, its downward trend is due to a low share of household income and a high share of corporate income in the GDP. Low wages fueled its export engine. The share of wages in GDP has been falling since the late 1990s and this is perfectly mirrored by the declining share of private consumption. However, as happened in Japan after its boom, the Chinese workforce will press for a larger share in the fruits of its labors or else the Chinese government will begin experiencing widespread labor unrest. Having the money to spend, however, but few consumer products to buy, as happened in Russia after it became more market-oriented, will only add to social unrest. China’s export-oriented economy cannot easily shift to a consumer products economy, not only because of production differences, but also marketing and market research, retail distribution, after-market service support – skills that China doesn’t possess or need to possess in an export-oriented economy.
After 2016, China will face the steepest aging curve of any large population in history. Not a happy prospect in a country with a healthcare system ranked 188 out of 191 nations by the World Health Organization. As a consequence of its one child policy, whose intent was to prevent widespread starvation, China not only reduced its future workforce, but also exacerbated it by changing the gender mix because of Asian depreciation of females. Chinese males outnumber females by 51.5% to 48.5%, while in the US females outnumber males 51% to 49%. That means there are 45 million more potential Chinese husbands than wives and mothers. By 2050 31% of China’s population will be over 60 years of age – i.e. 400 million elderly with no social security and few children to support them. The labor force is shrinking faster than the population. China is in a desperate race to get rich before it gets old and loses a large chunk of its workforce.
China’s surplus of males over females has fed its army, which helps absorb young Chinese men who will never find mates. Notwithstanding the U.S. Seventh Fleet’s presence in the South China Sea, China faces no significant land threat that requires an army. Since the 1980s, 100 million rural Chinese have moved to the cities. China needs the army to keep its population down on the farm. Without the army, the poor and rural population would rush into urban centers, causing China’s largely coastal cities to triple in size overnight. That, in turn, would cause these cities to collapse. Already, 93% of the population lives on 44% of the land along the country’s east coast.
The rush to the cities has contributed to urban pollution. The World Bank says that sixteen of the world’s twenty most polluted cities are Chinese. Over 70% of the water in China’s major rivers is already considered undrinkable. In a recent Forbes article, economist Joel Kotkin observes that if water is the "new oil," China faces a thirsty future. “China's freshwater reserves,” he says, “are about one-fifth per capita of those of the US and the U.S. has become more efficient in its water usage.” A less developed economy, like China, will face increasing demands from industrial and agricultural users as well as hundreds of millions of households that now don't enjoy easy access to clean drinking water.
China builds one coal-fired power plant every week and yet it is starving for energy to maintain its industrial development. It burns more coal – the source of two-thirds of its energy – than the US, Japan, and Europe combined, contributing to its pollution. Long an exporter of coal, it is now a major importer. Moreover, it is dependent on foreign oil imports for 60% of its oil consumption.
High energy consumption and cost, scarce water, and pollution are limiting China’s food production. It needs more dams to control flooding. Its pollution causes acid rain, which falls on a third of its agricultural crops, reducing yields. China now depends on the US and Canada to import its demand for corn, and as its economy becomes richer, the demand for high protein food – beef and pork – will outstrip its resources to produce them domestically.
A country with no democratic tradition, China relied on the dictatorship of the Communist party to set its course to a market economy. But government never makes complex decisions as effectively as open markets and competition do. The Soviet Union tried it for 70 years and failed to competitively allocate resources as efficiently as the US and other free market economies and thus collapsed. Today, for example, inflation in China is soaring, but the government-controlled interest rate, heavily influenced by crony capitalists and political insiders isn’t being raised fast enough. The Chinese money supply has recently grown at a 16% annual rate while inflation during the same period jumped from 2% to over 8% -- political suicide in an economy like ours. Yet the real money supply, after adjusting for inflation, was rapidly decelerating. This is one downside of not allowing financial markets to function freely.
Another basic problem plaguing Chinese capitalism is the lack of reliable information about the country’s economy. A high level Chinese official attending a cocktail party in Beijing with a group of international bankers was asked whether his country was getting serious in achieving transparency of the financial system. The official surprised the group with his forthright response: “Our model,” he said, “is that the best fishing is done in murky waters.”
Therefore, looking at the prospectus of any of the Chinese banks that have recently gone public one will read in the “Risks” section page after page of descriptions such as: “Mr. Wang of our Hong Su branch was arrested for embezzling $2 million. Mr. Hu, the branch manager in our office in wherever, was arrested for stealing $10 million.” The prospectus acknowledges that the bank has no risk management system and no liquidity management system. Yet, having gone public, it enjoys a market cap of $100 billion. This is what happens in an environment of massive surplus capital under government capitalism.
As China becomes a major player in the global society, America’s values and leadership are not lost on the governments of Southeastern Asia. They embrace America’s qualities more than those of China when deciding which to choose as an ally. Despite the recession that began in 2008 America’s global leadership has not been jeopardized even as Japan’s economy, heavily influenced by the US in the post-war years, slipped to third place in terms of aggregate output. We should reflect on why that happened to Japan, and we should return to the fiscal policies of the 1980s which led this country out of the Carter recession. Instead, the Obama administration seems determined to follow Japan’s failed Keynesian policies.
As for China, it will struggle for decades to solve the problems it must solve to become a diversified developed economy. We should hope it succeeds. If China’s economy fails or substantially shrinks, the global economy will not escape the consequences. But contrary to the expansive speculations of China apologists, the US will not be overtaken in a qualitative sense by China’s economy.
However, American economic policy must abandon its current reckless anti-business posture. It has caused $2.5 trillion in private capital to park on the sidelines because American employers are loath to invest in an economy stalled by “stimulus” spending and stymied by uncertainty about the prospects of higher taxes, stricter rules, and more regulations. In a speech before a technical conference this week, Intel CEO Paul Ontelli warned the Obama administration that unless it mended its ways, "the next big thing will not be invented here. Jobs will not be created here," because it costs $1 billion more to build and equip a factory in the US, 90% of which is due to taxes and regulations that other countries don’t have.
If present trends continue, the Carnegie Endowment for International Peace predicts that China is on track to equal the US GDP in 2035 and to be twice the US GDP in 2050. That’s a big “if” because present trends have a nasty habit of not continuing. We only have to recall the 1980s when American Henny Pennys were predicting the sky was falling because Japan was taking over leadership of the global economy and America’s only economic salvation was to become more Japanese. Thereafter Japan slipped into a 20-year long recession after a disastrous Obama-like government takeover of its economy, making the average Japanese poorer than the average citizen of Mississippi.
That China would overtake Japan in aggregate output has long been expected. It is inevitable that pundits would then begin speculating on if China will overtake the US and how long will it take. However, recalling the Nipponphobia of 30 years ago, should America expect that it will lose its hegemony as world leader any time soon – if ever? The predictable spate of recent Sinophilic books like Martin Jacques’ 400-page tome extravagantly titled When China Rules the World: The End of the Western World and the Birth of a New Global Order, Reed Hundt’s In the Shadow of China, and Fareed Zakaria’s The Post-American World say yes.
American business leaders know surprisingly little about China, and as Will Rogers once observed about common knowledge, “what they know ain’t so.” For example, it is widely thought that Chinese prisons are full of dissidents, when in fact the Chinese incarceration rate is 119 per 100,000 people against the US rate of 760 per 100,000 – the world’s highest. The mainstream media often reports Chinese persecution of Christians when in fact there are 80 million Christians in China and religious freedom is a constitutionally guaranteed right as it is in the US. There is more economic freedom in China than the US, which is strangling its economy with more taxes, regulations, and government spending. In 30 years, the government share of the Chinese economy shrank to 11% from 31% whereas, since Obama took office two years ago, the US debt-to-GDP ratio has grown from 40% to 63% and is projected by OMB to grow to 90% by 2020.
With 1.3 billion people, China is the world’s most populous country. Therefore its aggregate GDP statistic can be misleading. Per capita GDP is about $1,000 for China, about $10,000 for Japan, and $45,000 for the US. But China’s GDP growth rate has been growing an eye-popping 9% per year for 30 years, doubling its economy every eight years for three decades and moving 400 million people out of poverty. Recent US GDP growth has been 1.6%.
While China exports more in a day today than it did in all of 1978, the year before Deng Xiaoping announced its open market policy, it must begin fueling future growth from its domestic market by employing more people and turning them into middle class consumers. China is the world’s largest holder of money, currently sitting on over US$2 trillion in foreign currency reserves. It can’t hope for an ever-expanding global demand fed by foreign trade deficits and adverse current account balances – particularly when the US and European economies are in a multi-year funk with high unemployment rates.
China’s domestic consumption has fallen from 55% of GDP in the late 1990s to 36% recently. Long-term US domestic consumption has been 70% of GDP. Because China’s capitalism is corporate rather than private, its downward trend is due to a low share of household income and a high share of corporate income in the GDP. Low wages fueled its export engine. The share of wages in GDP has been falling since the late 1990s and this is perfectly mirrored by the declining share of private consumption. However, as happened in Japan after its boom, the Chinese workforce will press for a larger share in the fruits of its labors or else the Chinese government will begin experiencing widespread labor unrest. Having the money to spend, however, but few consumer products to buy, as happened in Russia after it became more market-oriented, will only add to social unrest. China’s export-oriented economy cannot easily shift to a consumer products economy, not only because of production differences, but also marketing and market research, retail distribution, after-market service support – skills that China doesn’t possess or need to possess in an export-oriented economy.
After 2016, China will face the steepest aging curve of any large population in history. Not a happy prospect in a country with a healthcare system ranked 188 out of 191 nations by the World Health Organization. As a consequence of its one child policy, whose intent was to prevent widespread starvation, China not only reduced its future workforce, but also exacerbated it by changing the gender mix because of Asian depreciation of females. Chinese males outnumber females by 51.5% to 48.5%, while in the US females outnumber males 51% to 49%. That means there are 45 million more potential Chinese husbands than wives and mothers. By 2050 31% of China’s population will be over 60 years of age – i.e. 400 million elderly with no social security and few children to support them. The labor force is shrinking faster than the population. China is in a desperate race to get rich before it gets old and loses a large chunk of its workforce.
China’s surplus of males over females has fed its army, which helps absorb young Chinese men who will never find mates. Notwithstanding the U.S. Seventh Fleet’s presence in the South China Sea, China faces no significant land threat that requires an army. Since the 1980s, 100 million rural Chinese have moved to the cities. China needs the army to keep its population down on the farm. Without the army, the poor and rural population would rush into urban centers, causing China’s largely coastal cities to triple in size overnight. That, in turn, would cause these cities to collapse. Already, 93% of the population lives on 44% of the land along the country’s east coast.
The rush to the cities has contributed to urban pollution. The World Bank says that sixteen of the world’s twenty most polluted cities are Chinese. Over 70% of the water in China’s major rivers is already considered undrinkable. In a recent Forbes article, economist Joel Kotkin observes that if water is the "new oil," China faces a thirsty future. “China's freshwater reserves,” he says, “are about one-fifth per capita of those of the US and the U.S. has become more efficient in its water usage.” A less developed economy, like China, will face increasing demands from industrial and agricultural users as well as hundreds of millions of households that now don't enjoy easy access to clean drinking water.
China builds one coal-fired power plant every week and yet it is starving for energy to maintain its industrial development. It burns more coal – the source of two-thirds of its energy – than the US, Japan, and Europe combined, contributing to its pollution. Long an exporter of coal, it is now a major importer. Moreover, it is dependent on foreign oil imports for 60% of its oil consumption.
High energy consumption and cost, scarce water, and pollution are limiting China’s food production. It needs more dams to control flooding. Its pollution causes acid rain, which falls on a third of its agricultural crops, reducing yields. China now depends on the US and Canada to import its demand for corn, and as its economy becomes richer, the demand for high protein food – beef and pork – will outstrip its resources to produce them domestically.
A country with no democratic tradition, China relied on the dictatorship of the Communist party to set its course to a market economy. But government never makes complex decisions as effectively as open markets and competition do. The Soviet Union tried it for 70 years and failed to competitively allocate resources as efficiently as the US and other free market economies and thus collapsed. Today, for example, inflation in China is soaring, but the government-controlled interest rate, heavily influenced by crony capitalists and political insiders isn’t being raised fast enough. The Chinese money supply has recently grown at a 16% annual rate while inflation during the same period jumped from 2% to over 8% -- political suicide in an economy like ours. Yet the real money supply, after adjusting for inflation, was rapidly decelerating. This is one downside of not allowing financial markets to function freely.
Another basic problem plaguing Chinese capitalism is the lack of reliable information about the country’s economy. A high level Chinese official attending a cocktail party in Beijing with a group of international bankers was asked whether his country was getting serious in achieving transparency of the financial system. The official surprised the group with his forthright response: “Our model,” he said, “is that the best fishing is done in murky waters.”
Therefore, looking at the prospectus of any of the Chinese banks that have recently gone public one will read in the “Risks” section page after page of descriptions such as: “Mr. Wang of our Hong Su branch was arrested for embezzling $2 million. Mr. Hu, the branch manager in our office in wherever, was arrested for stealing $10 million.” The prospectus acknowledges that the bank has no risk management system and no liquidity management system. Yet, having gone public, it enjoys a market cap of $100 billion. This is what happens in an environment of massive surplus capital under government capitalism.
As China becomes a major player in the global society, America’s values and leadership are not lost on the governments of Southeastern Asia. They embrace America’s qualities more than those of China when deciding which to choose as an ally. Despite the recession that began in 2008 America’s global leadership has not been jeopardized even as Japan’s economy, heavily influenced by the US in the post-war years, slipped to third place in terms of aggregate output. We should reflect on why that happened to Japan, and we should return to the fiscal policies of the 1980s which led this country out of the Carter recession. Instead, the Obama administration seems determined to follow Japan’s failed Keynesian policies.
As for China, it will struggle for decades to solve the problems it must solve to become a diversified developed economy. We should hope it succeeds. If China’s economy fails or substantially shrinks, the global economy will not escape the consequences. But contrary to the expansive speculations of China apologists, the US will not be overtaken in a qualitative sense by China’s economy.
However, American economic policy must abandon its current reckless anti-business posture. It has caused $2.5 trillion in private capital to park on the sidelines because American employers are loath to invest in an economy stalled by “stimulus” spending and stymied by uncertainty about the prospects of higher taxes, stricter rules, and more regulations. In a speech before a technical conference this week, Intel CEO Paul Ontelli warned the Obama administration that unless it mended its ways, "the next big thing will not be invented here. Jobs will not be created here," because it costs $1 billion more to build and equip a factory in the US, 90% of which is due to taxes and regulations that other countries don’t have.
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