The past three decades have seen miraculous economic growth for China.
With a larger GDP, a higher investment rate, and a faster economic growth rate than the
United States, it looks like it’s on its way to becoming the world’s top economic super power.
But one look at the hard numbers will reveal that the reality is quite the opposite.
In the 1990s and early 2000s, China was enjoying a prosperous moment. It was nearly self-sufficient
in food, water, and energy resources. It had a strong workforce, with many more working-age
adults than senior citizens. And it was gaining access to foreign markets and technology. But over
time, water became scarce. Food and energy imports exceeded those of other nations,
and the foreign markets they once depended on started to cut ties. The 2008 financial crisis
naturally made matters even worse. And now we know that the One Child Policy was a disaster,
too — China is about to experience the worst aging crisis in history. Over the next 30 years,
it will lose 200 million working-age adults, and gain 300 million senior citizens.
So how can a nation in this much peril be on the fast-track to having the
world’s strongest economy? Quite simply, it isn’t.
First off, there’s a difference between a strong economy and a big GDP. Let’s look at how GDP
is measured. The most common approach is the “expenditure method,” which simply adds up all
of the spending done by the government, consumers, and businesses in a country in a given time.
The problem is that almost anything can be called output — including expenses, like the countless
government dollars spent on supporting, feeding, and policing China’s 1.4 billion citizens.
GDP also counts production costs as outputs. For example, hiring employees counts as GDP growth,
simply because it increases employment. A company could employ a workforce of
slackers and call it growth, even if everyone just plays video games all day.
Remarkably, nearly all of China’s economic growth since 2007 has stemmed from inputs:
hiring workers and spending money. Productivity growth—that is,
increasing output for every unit of input— has been almost nonexistent. The reality is that
China has achieved high growth at high costs, and now the costs are rising while growth is slowing
For example, China has built 50 plus “ghost cities” — entire
metropolises of empty office buildings, apartment complexes, and even airports.
In industry after industry, from refining to ships to aluminum,
the picture is the same—factories sitting idle or churning out products that don’t get used.
More than one third of China’s industrial capacity goes to waste — and while the
total losses are hard to calculate, the Chinese government estimates that between 2009 and 2014,
it threw away nearly $7 trillion on “ineffective investment.” Not only that, China is also on
record for having the largest, fastest-growing debt ever recorded by a developing nation.
Now, to China’s credit, it leads the world in manufacturing and e-commerce, and it exports
goods that the whole world benefits from. But the defects greatly outweigh the merits,
and will have a far more lasting impact on China’s economy.
So if the popular depiction of China’s rise is wrong, how can we get a more accurate view of The
Middle Kingdom’s economy? The best approach would be to create a balance sheet for each country:
assets would go on one side of the ledger and liabilities on the other. Net wealth would be
calculated by subtracting the liabilities from the assets. Could such a balance sheet really be
made for a whole country? Yes. The World Bank and UN have already gotten a head start and published
estimates for the real wealth of nations. These databases reveal the same result: not only is the
US wealthier than China — that gap may be growing by trillions of dollars each year.
What does this mean for the rest of the world? Historically, when fast-growing great powers
slow down, they do not mellow out. Instead, they become more repressive at home and aggressive
abroad. They crack down on domestic dissent and expand overseas to find new sources of wealth,
rally citizens around the ruling regime, and deter foreign rivals from exploiting their
economic problems. China is already on this path—as its growth slows,
it is repressing freedom in the mainland and in Hong Kong, ramping up pressure on Taiwan,
colonizing the South China Sea, building the largest navy in the world, and buying assets
and building ports all over the world. These actions could be just a preview
of what is to come in the years ahead as China’s economy slows further.
The United States must firmly but patiently contain China with a careful blend of deterrence,
reassurance, and damage-limitation. These moves would not eliminate the root causes of U.S.-China
rivalry, but they would protect U.S. interests while avoiding a slide to a cold or hot war.
To learn more about the power balance between the United States and China
check out the link to my book Unrivaled: Why America Will Remain the World's Sole Superpower.
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