The future might not belong to China

The future might not belong to China, by Martin Wolf.

China has had a hugely impressive four decades. After their triumph in the cold war, both the west and the cause of liberal democracy have stumbled. Should we conclude that an autocratic China is sure to become the world’s dominant power in the next few decades? My answer is: no. That is a possible future, not a certain one.

The view widely held in the 1980s that Japan would be “number one” turned out to be badly mistaken. In 1956, Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, told the west that “We will bury you!” He proved utterly wrong. The examples of Japan and the Soviet Union highlight three frequent mistakes: extrapolating from the recent past; assuming that a period of rapid economic growth will be indefinitely sustained; and exaggerating the benefits of centralised direction over those of economic and political competition. In the long run, the former is likely to become rigid and so brittle, while the latter is likely to display flexibility and so self-renewal. …

A conventional view is that by, say, 2040, China’s economy will be far bigger than that of the US, with India far smaller still. …

As with Japan in the 1980s, the policies of ultra-high investment and rapid debt accumulation, which kept China growing so fast after the 2008 financial crisis, make it vulnerable to a sharp deceleration.

Crucially, China’s investment rate, at 44 per cent of gross domestic product in 2017, is unsustainably high. … Not surprisingly, returns on investment have collapsed. In sum, investment-led growth must come to an early end.

Because of its size, China has also hit the buffers on export-driven growth, at a lower level of income per head than other high-growth east Asian economies. The trade war with the US underlines this reality. China’s working-age population is also declining. Given the huge rise in debt as well, sustaining fast growth will be very hard. …

The biggest hurdle of all, especially to the needed upsurge in productivity growth, is the shift towards a more autocratic political system. …

Today, credit is still being preferentially allocated to state businesses, while state influence over large private businesses is growing. All this is likely to distort the allocation of resources and slow the rate of innovation and economic progress, even if an outright financial crisis is avoided.

Reader Philip:

Deng Xiaoping allowed a ‘free’ market for small business and the place boomed. Emperor Xi is closing it down – seizing defeat from the jaws of victory. An aging population and an already unpayable debt exacerbates the problem.

All while he is committing China to more and more overseas projects that it cannot afford.

hat-tip Bob