Can China sustain its rate of growth and will it really become a superpower?
This week, the Chinese Communist Party is holding its 18th National Congress to make a once in a decade change in its leadership. This has led much of the media to highlight the expectation that in a few years China will become the largest economy in the world and to speculate about whether China is on the road to becoming a new global superpower.
As I have mentioned in a couple of recent postings, I am in the process of reading a book entitled “The Next 100 Years” by George Friedman.
He asserts: “China’s economy is not nearly as robust as it might seem, and its political stability, which depends heavily on continued growth, is even more precarious.”
At the heart of this assessment is China’s debt burden. Friedman argues that the country is not truly capitalist and therefore capital allocation is not determined by markets but by cronyism. He insists that “a remarkably large number of these loans have gone bad – ‘nonperforming’ in the jargon of banking.”
The figures he quotes are that somewhere between $600 billion and $900 billion of loans are bad. This is between a quarter and a third of China’s GDP – “a staggering amount”. He says of China’s bad debt rate: “China’s, under the most conservative estimate, is about 25 per cent – and I would argue the number is closer to 40 per cent”.
Friedman reminds the reader of the Japanese experience. In the 1980s, Japan had an astonishing growth rate and Americans were terrified that Japan was taking over global trade. The debt bubble burst and, for the last two decades, the Japanese economy has been stagnant. Japan has survived this because living standards were high and the country enjoys social cohesion.
According to Friedman, “China is Japan on steroids.” But he goes on: “The problem for China is political. China is held together by money, not ideology. When there is an economic downturn and the money stops rolling in, not only will the banking system spasm, but the entire fabric of Chinese society will shudder.”
This weakening of the central power, the rise in regional dissent, the relative isolation of the country geographically, its lack of a stong navy, all lead Friedman to state boldly: “I don’t share the view that China is going to be a major world power.”
November 20th, 2012 at 12:45 am
In answer to the two questions, my answers Yes both times, but Friedman is right about there being a high risk of political instability. In this Internet age, it is harder than ever to suppress thought, not to inhibit the people’s natural desire for betterment of their lives. The stoicism of the previous generations has been replaced by rising expectations, which have to be met by a tide of consumerism and ultimately rising wages. The government may use diverting military adventures to boost its position, but as Argentina found in 1982 that only lasts as long as success is maintained.