May 2, 2014 7:44 pm
China: On top of the world
In two essays, the FT’s chief economics commentator and Asia editor examine the significance of China’s imminent emergence as the world’s biggest economy
US hegemony will last for years, writes Martin Wolf
This week we learnt that China is about to overtake the US as the world’s largest economy. Since the latter is believed to have had the world’s largest economy since the early 1870s, this is a noteworthy moment. But it is not as noteworthy as many fear and others hope.
Start with what these calculations, derived from the World Bank’s longstanding international comparisons project, mean. This is an attempt to compare standards of living across countries. In 2011, China’s gross domestic product per head at market exchange rates was just 11 per cent of US levels. But once the low prices of many of China’s relatively non-tradeable goods and services are taken into account, this rose to a fifth of US purchasing power per head.
Nevertheless, China is still a poor country: the purchasing power of its GDP per head was 99th in the world. Since China also invests close to half its output, relative consumption per head was lower still.
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China is, however, an enormous country, with a population of 1.34bn in 2011. Compared with this, even the US, with 312m, is almost a minnow. So in spite of being so much poorer, the purchasing power of aggregate Chinese GDP was 87 per cent of US levels in 2011. The purchasing power of China’s GDP has by now surely surpassed US levels.
It is possible to debate whether the newly revised numbers are right. The answer is that they are reasonable. A more important question is what they mean. What they do not mean is that China is already the world’s greatest economic power.
China is a huge trading power. Its exports of goods last year were 14 per cent bigger than those of the US. But its imports of goods were 31 per cent smaller. It is the size of the market a country offers that determines its clout in global bargaining. China is not the world’s largest importer yet. As its economy continues to grow relatively rapidly, it will become the world’s largest soon.
A different dimension of economic power is holdings of foreign exchange reserves. China’s total of $4tn in March is gigantic. But this is at least as much a source of weakness as of strength. Over many years, China has accumulated assets western central banks can create in a heartbeat by pressing a few keys. Yes, China could dump these assets. But it would be the chief loser. In our savings-glut world, the US could readily find other buyers.
US financial markets and financial companies are at the centre of the global financial system. This gives America exceptional influence over the shape of global finance and details of global regulation. The probability is that this will remain true for a long time, partly because the Chinese financial system confronts many challenges in managing its exit from a gigantic credit boom.
Another dimension of global economic influence is technology. An indication that China remains well behind is that economywide average productivity remains a fifth of US levels. Even more important is the absence of world-leading Chinese technology companies, with the principal exception of Huawei. The US, by comparison, hosts a number of world-leading companies.
It is possible to debate whether the numbers are right. A more important question is what they mean
The technological edge and scale of US spending on defence gives its military global reach and power. That is likely to last for quite some time. The US is also in effect a huge island, with relatively weak and friendly neighbours to its north and south. China, on the other hand, is surrounded by powerful and jealous countries. And the US has long been able to create powerful alliance systems. China has failed to match that.
The US possesses “soft” advantages, too: an influential popular culture; the world’s leading institutions of higher learning; an unmatched scientific base; and a commitment to the ideals of freedom and democracy that remain attractive to much of the world, however far short it has so frequently fallen in practice. To much of the rest of the world China’s political system is far less attractive and its historic culture far more alien than that of the US.
Over time, we can confidently expect the Chinese economy to continue to increase in relative size. The same is true of the country’s technological level and military capacity. But it will be a long time before the rising colossus will match the ability of the US to influence the world, provided the latter is wisely governed.
Yet it is also true that we are moving into an era in which China’s rising power and influence must be recognised and accommodated, notably in global governance. Such transitions in power are difficult.
In this case, they are likely to prove particularly tricky, given how different the two powers are. The latest announcement is another step on what will prove to be a long and winding journey.
China is already changing the world, writes David Pilling
When Deng Xiaoping said “hide your brightness, cherish obscurity”, he had not counted on the meddling statisticians at the International Comparison Program. This week, the ICP, a statistical collaboration hosted by the World Bank, “outed” China as poised to become the world’s biggest economy this year measured by purchasing power.
In line with the advice of the father of Chinese reform, who thought China’s rise would be best served by downplaying its ambition, Beijing was not happy. In the ICP report, published this week, China’s National Bureau of Statistics expressed reservations about the methodology and said it did “not endorse the results as official statistics”. The tightly controlled media, far from trumpeting the news of China’s sudden elevation to the world’s economic summit, played it down or ignored it altogether. “The Chinese understand that this is an accounting exercise, not a substantive milestone,” says Minxin Pei, director for international studies at Claremont McKenna College in California.
In one sense, China’s modesty reflects a firm grip on reality. China is a middle-income country at best, with per capita income somewhat below that of Peru. Its technological capabilities are far behind the US and other western economies, including historic adversary Japan. Militarily it has nothing like the global clout of the US. Its powers of persuasion are also lacking. China does not have a sufficiently attractive political system to influence global opinion. Its closest allies are the likes of North Korea and Pakistan. Mao Yushi, the 85-year-old economist who is considered one of the intellectual authors of China’s economic modernisation, takes a studiously realistic view of the new numbers. He accepts that China is the world’s biggest economy but considers this to be nothing more than a reflection of the fact that it is home to 1.36bn people, more than any other nation.
“It is not a surprise that China’s economy is big but this is just because its population is big,” says Mr Mao. “China is big, but not strong.”
A lot of this is below the radar. So when you get a moment like this – a sorpasso – it’s a wake-up call
Chinese people, who have been “humiliated” by their country’s weakness since the 19th century, are delighted at the newfound economic prowess, he says. But in other aspects, it is obvious that China is behind. “China contributes very little to scientific advancement . . . China’s politics are not democratic and there are many unstable factors in Chinese society.”
Mr Mao, purged repeatedly during the Maoist era and even now considered to have risky views, is among those who predict a big financial crisis as a result of over-investment and towering debts.
Yet, argues Martin Jacques, author of When China Rules the World, it is perpetual predictions of systemic implosion that have prevented our seeing what should be blindingly obvious: China’s rise will change the world. “There’s still a denial about China, an inability to see the underlying trend,” he says. China has passed various milestones – biggest exporter, biggest manufacturer, biggest carbon emitter – more quickly than almost anyone predicted. There’s a reasonable chance, he predicts, that by 2030, China will account for a third of global output and have an economy larger than that of Europe and the US combined. “A lot of this is below the radar. So when you get a moment like this – asorpasso – it’s a wake-up call.”
China’s rise has changed the world already. By becoming the globe’s low-cost factory, it has cut the cost of manufactured goods. That has increased consumers’ purchasing power, although competition from hundreds of millions of Chinese workers may have lowered western wages in the process.
As a huge importer of raw materials, China has begun to alter the fates of commodity exporters from Brazil to Australia and from Mongolia to Angola. If Africa’s economy is finally stirring that is in no small measure due to Chinese demand.
Mr Mao, though a critic of many aspects of China’s political economy, is clear that “China has made a remarkable contribution to the world economy” and that it has much to teach other developing countries.
Strategically, too, although China possesses nothing like the military might of the US, it is already having an impact regionally where it is asserting claims over historic spheres of influence. That explains heightened friction with Japan over the Senkaku/Diaoyu islands and with Vietnam, the Philippines and others over the South China Sea.
Mr Jacques, who considers America’s “hegemonic” postwar role in Asia as unsustainable, regards these ructions as “the first growing pains of a new China-centric order in the region”. Speak it softly, but China has already arrived.
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