China - a dragon or a bubble?

Posted by Alexander Hay

While China's progress in recent years has been remarkable, its future remains uncertain.

The Chinese dragon rises, but for how long?

Should we be afraid of China? The Tiger Economy with more than one billion souls and 1600 Giant Pandas has apparently taken Finland's crown as the best educated nation in the world and is predicted to be the world's biggest financial power by 2026. 

Elsewhere its power grows: Take for example its investment in a blue water fleet and better equipped military. Elsewhere, the People's Republic continues to expand its influence over its African interests while its cities boom and its strategically vital rare earth resources put it in an excellent position to oust the United States as the planet's pre-eminent power.

But the details do not always coincide with reality. Take the size of China's economy. At just over $10 trillion a year [according to the IMF], the PRC certainly dwarfs the now third largest economy, Japan, with only $5.2 trillion to its name. Yet if we look at the America economy - all $14.26 trillion - and its population of more than 310 million, and assumed China had an identical population, then the Chinese economy would only be worth around $2.3 trillion. China's main advantage is the sheer size of its population, which inevitably distorts calculations, and given its gender imbalancerapid ageing and falling birth rates, this is an advantage it may not retain for long.

Poverty is another factor to consider. While the United States' gap between rich and poor is nothing to brag about - 300,000 rich Americans share as much income as the 150 million poorest - China's record is even worse: 50% of the country own only 12% of the wealth, with a large disparity in earnings between urban and rural workers. Being the largest economy in the world will not resolve this. If China's economy were $15 trillion, GDP per head would still be under $12,000, whereas American GDP is over $46,000. 

Meanwhile, Education is also not all it seems either. Firstly, the schools cited in the PISA survey are based in affluent, developed Shanghai and Hong Kong, and not the rest of the country. This is telling as the yardstick for academic achievement in China is lower than its neighbours - an adult rural worker is assumed to be literate if he can read more than 1500 Chinese characters and a similar worker in an urban area is considered literate if he can read 2000. 

But in order to graduate from the Taiwanese equivalent of secondary or high school you need to be able to read 4808 characters, with more of an emphasis over the more difficult Classical Chinese over the more easy to learn Simplified Chinese favoured on the mainland. There is sometimes something of the tractor factory in Chinese statistical data.

Similarly, it seems the Chinese economic miracle is not all it appears either. Li Keqiang, who may well be the next Chinese Premier, admitted in a memo released by Wikileaks that while rates of electricity use, bank lending and rail freight were reliable yardsticks of economic data, much of China's GDP, especially on a local level, was - as he put it - 'man made'. 

Elsewhere, economists have begun to sound alarm at how overheated China's rapid economic growth is becoming. According to these critics, China has too much capacity, companies are cooking the books and its economy is under-performing in comparison to the amount of government stimulus it receives. 

Finally, China's rise should not be seen in isolation but, once again, in relation to the United States of America. China's growth is dependent on exports, and the biggest market for China's cheap and cheerful output is America. If Americans stop buying Chinese goods, then the Chinese economy stops growing. This co-dependence goes both ways. A reliance on cheap, foreign labour also keeps America's inflation low. It is also China's biggest debtor and relies on it for further largesse. American and China need each other, and this makes both sides vulnerable.

We have, after all, been here before. It was only 20 years ago that all the talk was of this century being a Japanese century. We all know how that ended, and while world affairs veterans predict a shared Sino-American future, the reality may be quite different - who, five years ago, would have predicted the imminent demise of our own boom? This is not to disparage China's remarkable progress in the past 30 years, nor its drive and raw potential. But it is time for China to realise that getting to the top isn't half as hard as staying there.

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Alexander Hay

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