Is China about to overtake the U.S. as the world’s leading economy? That’s the message from Standard Chartered Bank analysts, who have written a report sure to cheer the hearts of the “America Last” crowd.
Today’s progressive Democrats are perennially negative on the future of U.S. capitalism, convinced that income inequality and rapacious corporate greed will doom our growth.
They didn’t imagine we could enjoy an upturn in manufacturing or growth topping 3 percent; they would of course expect that China’s state-dominated economy will outperform over time. They could be wrong.
The Standard Chartered analysis suggests that as early as next year, China’s economy will be larger than that of the U.S., which will never again be No. 1. The claim evolves from statistics combining purchasing power parity (PPP) and GDP figures.
Critics charge that comparing purchasing power across nations is almost impossibly complex given the many factors that set prices and the individuality of consumer needs and tastes.
Using the more common GDP comparison, the U.S. economy is about 1.5 times bigger than China’s — not even close.
But, the gap has certainly narrowed in recent years as China has grown faster. Even last year, when China hit a soft patch and the U.S. roared ahead, Beijing could boast growth above 6 percent compared to around 3 percent here at home. If you extrapolate from recent trends, China will undoubtedly overtake the U.S. in the next decade.
There are five reasons that China’s future may not look much like its past. First, the country is drowning in debt and, as important, debt-fuelled spending is not as productive as it once was. Second, Chinese President Xi Jinping has put a hold on much-needed economic reforms.
At the same time, he is creating a police state with expanded surveillance in which business leaders can be snatched off the streets at the whim of the dictatorial government. Lacking a rule of law undermines confidence and investment.
Third, President Trump has enlisted many countries around the world in his pushback against China’s mercantilist policies. Two of Xi’s signature programs — the Belt and Road Initiative and Made in China 2025 — are now facing scrutiny, if not downright hostility, around the globe.
This will make it harder to achieve the expansion Beijing has targeted. Fourth, thanks to the one-child policy, the working-age population in China is shrinking. An ever-expanding labor pool will no longer drive growth.
Finally, President Xi has made it clear that he is not eager to push further economic reforms, such as reducing the government’s heavy footprint on the economy.
In one example, an Australian paper noted that, “Small Communist Party committees are being imposed on private corporations as part of a push by Chinese President Xi Jinping to reassert party control over all aspects of Chinese life.”
There has never been a centrally-planned economy as robust, innovative and successful as the market-driven U.S. There never will be.
Much of China’s growth in the past several decades has stemmed from an unprecedented debt-fuelled spending spree that has left the country host to numerous “zombie” cities, built from scratch, that now stand mostly empty.
Some of those ghost towns were created to accommodate manufacturing hubs that instead moved to Vietnam or Thailand.
The Financial Times reported that “from the start of 2012 to the end of 2016, China produced nearly three times as much cement as the U.S. in the entire 20th century.”
It’s not just mega-projects that have attracted investment; home-building, too, has been driving the economy. But Ian Bremmer, head of Eurasian Group, calculated there are 65 million urban homes in China today that are vacant — some 20 percent of the total. As he noted in a tweet: “Particularly not good when housing, construction, and related industries is 1/3 of economic growth.”
Though such spending has long been a staple of Beijing’s playbook, it got an extra boost after the financial crisis. As Martin Wolf notes in the FT, “Between early 2004 and late 2008, Chinese gross debt was stable at between 170 and 180 per cent of gross domestic product.”
In 2008, in the wake of the financial crisis, China undertook a huge stimulus program equal to 12.5 percent of GDP, which drove total debt roughly to its current level of about three times GDP.
The potential dangers of China’s infrastructure juggernaut have not gone unnoticed. For the past few years, officials have attempted to reduce the nation’s borrowings and pivot to a consumer-led economy.
It hasn’t worked; growth in the past two quarters weakened, Beijing returned to its old habits, ramping up borrowing and construction spending.
Today, China is struggling on multiple fronts. Its stock market was the world’s worst performer in 2018, and car sales were down last year for the first time in 30 years. Exports, factory activity, retail sales are all sliding. Growth has slowed; recent estimates put 2019 expansion at 6.3 percent, the weakest in 29 years.
In response, the Chinese central bank just injected a whopping $83 billion into the banking system, the biggest single-day stimulus move ever.
Stimulus measures will likely boost China from the current slump but will not ensure a return to the heady days of rapid growth. Make no mistake, China should, on the basis of population, become the world’s largest economy.
But as the government reasserts its absolute control, it could well undermine the nation’s future. If there is to be a horse race, we’ll put our money on the messy, dynamic and ultimately successful United States. The last country that was “inevitably” going to overtake the U.S. was Japan. That didn’t work out, either.