Threat from China May Be Empty

Every few decades, the United States manages to worry itself about a supposed threat to its global economic leadership. In the 1950s and 1960s, there was fear that the Russians, with their planning approach to economic development, might pose a serious challenge to US economic hegemony. In the 1970s and 1980s, it was the Japanese whom we feared for their supposedly superior corporate model for the economy.

Today it seems to be the turn of the Chinese to worry us with their very large population and their enviably high rates of domestic saving and investment. However, a closer look at the Chinese economy would suggest that China’s economic threat to US economic dominance could prove to be as ephemeral as did the earlier Russian and Japanese threats.

The consensus view on China’s inevitable economic emergence is perhaps best encapsulated by the following quote from Martin Wolf of the London Financial Times. Earlier this year, he wrote: “Almost two out of every five people on the planet are either Chinese or Indian. China alone has more people than Latin America and sub-Saharan Africa combined. The economic rise of Asia’s giants is therefore the most important story of our age. It heralds the end, in the not too distant future, of as much as five centuries of domination by the Europeans and their colonial offshoots.”

On the surface, Martin Wolf’s assertion about China’s inevitable rise has certain plausibility. After all, with more than 1.3 billion people, China’s population is around five times that of the United States. Moreover, since Deng Xiaoping’s opening up of the Chinese economy in 1979, China’s real GDP has grown at an average rate of 9.5 percent a year. This growth has resulted in a more than ten-fold increase in the Chinese economy since 1979 to its present level of around $1,600 billion. As a result, the Chinese economy is now already around one eighth of the size of that of the United States.

China’s impressive narrowing of the economic gap between itself and the United States over the past twenty five years has paralleled in many ways the earlier economic miracles of countries like South Korea, Singapore, Hong Kong, and Taiwan. Like these Asian economic tigers, China too has based its economic strategy on export-led growth. This is reflected in the increase in the relative size of China’s export sector from 10 percent of its economy in 1990 to around 35 percent at present. At the same time, like the Asian tigers China’s economic growth has been fueled by a domestic savings rate in excess of 40 percent of its GDP.

Impressive as China’s economic growth to date might have been, the question needs to be asked whether China might not share some of the vulnerabilities that led to the Asian crisis of 1997-98. Might not China’s increase in its investment to GDP ratio, from around 38 percent in 2000 to a staggering 50 percent at present, expose China to a more severe investment bust than that which it experienced in the early 1990s? Or might not China’s excessive investment, especially in the speculative real estate sector, be compounding the serious bad loan problem in its banking sector? Already prior to the latest round of lending excesses, China’s banks were estimated to have non-performing loans on their books in excess of 50 percent of GDP.

At a deeper level, one also has to question whether China’s export-led model of development can be sustained in a world which is becoming increasingly resistant to globalization. Can China still really expect its economy to be fueled by the 30 percent a year type of export growth that it has experienced over the past decade? Is not the U.S. Senate, with its proposed 27.5 percent import tariff on China unless it revalues its exchange rate, sending China a clear message that it should no longer expect the United States to be China’s buyer of last resort?

Experience with all too many emerging market economic crises should have sensitized us to the folly of simply extrapolating China’s past impressive economic performance into the indefinite future. Indeed, China’s very large macroeconomic imbalances should be alerting us to the very real risk of a major reversal in China’s economic growth performance within the next couple of years. When that happens, the weak underbelly of China’s mixed economy will be exposed and we will be asking ourselves how we ever could have been worried about a Chinese economic threat.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Event Registration is Closed
Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.