The Chinese Puzzle
The launch on 16 January in Beijing of the Asian Infrastructure Investment Bank as a counterweight to the us-dominated World Bank is an indication of China’s determination to expand its global financial role
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Is the China crisis as grave as many analysts think? Yes and no. China’s annual gross domestic product (GDP) growth has dipped to 6.9 per cent. It could fall further. Clued-in observers say real GDP growth, bereft of fudging, is already below 5 per cent.
The Chinese stock market has plunged after a huge run-up over the past few years. Foreign exchange reserves have fallen — though at over $3 trillion they are still 8 times India’s. The 7 per cent depreciation of the yuan hasn’t helped bolster Chinese exports as global trade volumes continue to shrink.
Worse, Chinese debt has shot up to 250 per cent of GDP. Glittering new cities across China, built from scratch over the past ten years, are like ghost towns: buildings lie empty and streets are deserted.
So is the China story over? Is it moving in the direction of Japan which grew at a furious pace for 30 years before sliding into deflation in 1989 — from which it is still struggling to recover?
The answer to both questions is no. China has serious economic imbalances but its engine of growth is sputtering, not idling.
China’s 35-year growth cycle since the Deng reforms of 1979 is changing gears. The country leapt from a per capita income roughly similar to India’s in the 1970s to that of a middle-income country in just over a generation.
China’s growth was fuelled by exports and industrial manufacturing. Now it must rebalance the economy by focusing on services and consumption. China’s unprecedented double-digit decades-long growth has made it the world’s largest economy by purchasing power parity (PPP). According to the latest International Monetary Fund (IMF) data, China’s GDP (PPP) is $18.10 trillion, ahead of the US’s’ GDP of $17.35 trillion.
This in itself is an extraordinary — and historic — achievement. The US has been the world’s largest economy since the 1890s when it surpassed Britain’s GDP. America’s 125-year-old economic dominance has been ended by Beijing’s astonishing manufacturing-led growth that has made it the factory of the world.
But like all good stories, this one now needs a change in narrative. China’s slowdown as it rebalances its economy is one of the principal causes of the plunge in global commodity prices, especially oil. The fall has driven commodity-department countries like Russia and Brazil into recession.
Saudi Arabia meanwhile is facing a budget crisis. Consider the numbers: Riyadh pumps around 10 million barrels of oil every day. A fall in the price of crude from $115 in May 2014 to around $30 today translates into a loss of $85 a barrel or $850 million a day on its daily crude output of 10 million barrels. Over a year, that loss mounts to more than $300 billion — a humongous figure for a country with a relatively small economy (GDP: $746 billion).
China’s problems pale in comparision. Even a 5 per cent GDP growth on an $18-trillion economy is a surge of $900 billion a year. Beijing will be content to cruise at 5-6 per cent a year while it shifts economic focus from manufacturing and exports to consumption and services. It needs to fill those empty buildings and populate those ghost cities.
On January 1, 2016, China officially ended its one-child policy. China’s fertility rate is now below replacement levels. The country’s population will plateau at around 1.45 billion and then start dropping. Already Beijing’s parks are packed with retired folk, many in their 70s and 80s.
The greying of China, as the median age rises, is the opposite of India’s youthful demographic dividend. While India needs to find jobs for its growing population, China needs to reverse its population decline. It is a problem that has played a role in Japan’s stagnation too: the country, along with several in continental Europe like Germany and Italy, faces a steep fall in population.
This is a social time bomb. As a country ages and its population declines, the ratio of the elderly on pensions to young wage earners rises. This puts a huge strain on government finances. Taxes inevitably rise to pay for welfare, healthcare and pensions of those above 60. The young, in poorly paid jobs or without jobs at all, end up paying for their parents’ and grandparents’ social security. It is not a recipe for social harmony.
The Chinese know this. While rebalancing their economy they are encouraging young couples to have more children. They are the country’s future insurance policy. Significantly, countries where populations are rising have the world’s fastest-growing economies.
Three examples: India, Britain and the US. Britain and America have fast-expanding populations due to high immigrant birth rates. Their economies are the most robust in the West. And India of course is the world’s fastest-growing economy.
These lessons are not lost on Beijing. President Xi Jinping’s most prominent recent visits have been to the US, Britain and India.
The launch on 16 January in Beijing of the Asian Infrastructure Investment Bank (AIIB) as a counterweight to the US-dominated World Bank is an indication of China’s determination to expand its global financial role. Anyone who writes China off does so at his own peril. Beijing has history on its side.
As I wrote in my book, The New Clash of Civilizations: How The Contest Between America, China, India and Islam Will Shape Our Century: “In 1700, China was the world’s second most populous nation with 152 million people and the world’s second largest economy after India. Together the two Asian giants produced nearly 50 per cent of global economic output. The yet-to-be United States was still a smattering of thirteen British colonies. And Britain? It had a population of 8.6 million and produced a mere 3 per cent of the world’s economic output. Colonisation and the Industrial Revolution changed the world dramatically over the next 150 years. By 1870, the average Briton was six times richer than the average Chinese. Beyond the numbers, however, lies the real story. For the first time since the West became the world’s dominant geopolitical, military and economic force 200 years ago, the tide has turned decisively. The rise of China, the relative decline of the US, and the fall of Western Europe will establish a new world order.”
No one is more aware of this than President Xi Jinping, China’s most powerful leader since Deng Xiaoping, and his inscrutable mandarins in Beijing.