Is China the new America? That question has been popping up around the world ever since the Chinese economy expanded by 8.9% in the third quarter last year. Frequency, however, doesn’t make a silly question any less ridiculous.
Uncle Sam’s wallet still holds US$14.3 trillion, or 23% of the world economy. He polices regional conflicts while managing the international reserve currency. He even operates the planet’s video store. History says America will eventually alter, lose or retire from the lead role it plays on the world stage. But the land of Red capitalism will never take over Washington’s part because the emerging world order is a G20 production. No nation will ever again dominate as America does today. Thinking otherwise is outdated — so G8. The real question is whether China is taking over as the driving force of the world economy.
Don’t bet on it. China is clearly a major financial player. It has socked away a US$2-trillion-plus foreign reserve war chest. It has overtaken Canada as the top supplier to the United States. It has surpassed Germany to become the world’s third-largest economy. Nevertheless, as Minxin Pei, senior associate at the Carnegie Endowment for International Peace, recently pointed out, the sun isn’t ready to set on Pax Americana. According to Pei, it will take the average Chinese citizen about half a century to reach mean U.S. income levels. And that’s assuming all goes well with China’s bubbling assets, industrial overcapacity, aging population and export dependency problem.
Keep in mind that there is nothing miraculous about China’s recovery. The global financial crisis initially slammed the brakes on the nation’s economic expansion, wiping out about 20 million export-related jobs — this in a country where anything under 8% growth is generally considered to be too slow for social comfort. But then it bought its way out of trouble via the mother of all stimulus packages. “If I told you that the next U.S. stimulus package would be US$4.5 trillion, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term?” asked John Mauldin, a Texas-based adviser to the rich, in his popular newsletter. “That is the equivalent of what China is now doing.”
Bad debt issued by state banks has fuelled growth for years. Asia financial analyst Arthur Kroeber doesn’t think a meltdown is imminent; in a string of commentaries on China late last year, he argues the game can continue for some time, thanks to “accounting opacity and large cash reserves.” Still, he says, “there will need to be one almighty cleanup in a few years.” So as an engine of turmoil, China could turn out to be the new America after all.
To lead the world economy, however, the nation must reduce its reliance on exports. To do that, economists say Chinese household spending, which sits at about 35% of GDP, has to rise above 50% — which can’t happen overnight. Massive spending on infrastructure and construction projects can obviously buy China time. But Beijing’s wealth also poses a problem, since its cash reserves are heavily tied to the greenback. China pays a huge price when the U.S. dollar declines. And if it moves to seriously reduce that exposure, global trade imbalances will force the local currency to rise in value, making exports more expensive.
Meanwhile, according to Pittman Potter, a senior fellow with the Asia Pacific Foundation of Canada, China’s stimulus spending will do little to help urban professionals, private-sector business managers and recent college graduates (who have an unemployment rate near 50%). And when it comes to social unrest, this is the crowd to watch.
Simply put, until China develops a sustainable growth model that supports innovation, social stability and consumption at home, American and other developed-country consumers will drive the world economy. China can throw its weight around and lend other nations all the money it wants, but it will still ride shotgun in the near term.