Zero to Hero: China to be the next economic superpower?
'For China to gain a dominant status... it must also become an innovative society'
Hamish Maccaig | 7 November 2015

With the current figures released about China’s economic growth rate, it comes as no surprise that this East Asian giant is heading towards a position of being the next economic superpower. In the last quarter, China overtook the US as the largest trading country in the world. Currently in China, the growth rate stands at 7.7% per annum, but is this set to continue in the future?

As well as the figures, there are many structural advantages and cultural shifts that mean China could retain high levels of growth for the future. This may well enable them to attain the much sought-after title of ‘Superpower’. For example, urbanisation and the rapid expansion of service industries will generate jobs, putting downwards pressure on unemployment. As well as this, China carries with it a sense of security for other countries; they are a source of safe loans to send abroad. This means that China’s growth does not just benefit themselves, it has major positive knock-on effects, such as the current $100 billion a year of Chinese goods and service imports, supporting more than half a million U.S. jobs.

China also has the potential to be a dominant economy for a long time, as its economy ranks first in the world for: numbers of college graduates (7 million per year); rate of economic growth (10 percent from 1980 to 2010); major airports (43) and many other areas. By 2025, it is likely to have the world’s largest gross national product. All of this gives China a huge advantage when it comes to economic growth, which should enable it to continue growing for years to come – but there may be some hindering factors to this.

However, there are some false perceptions that we have about China, which make many economists believe that it is not going to be the next economic superpower. For example, investment has been slowing for some years, and it is now a smaller fraction of GDP than consumption. The fall in investment may result in a negative multiplier effect as machinery becomes outdated and deteriorations in efficiency, along with increases in spare capacity, ensue. As well as this, manufacturing is set to no longer be the dominant sector of their economy; instead services are forecast to take over this role.

With these developments since the 1990s, China now has several problems, which must be tackled in order for it to continue as an engine for global growth. These include: dealing with an aging population; a gender imbalance produced by its one-child policy; and the combination of water shortage problems and pollution issues. These are not the only problems facing China. It must also find a way to produce millions more jobs in order to continue its economic growth. It must overcome internal ethnic issues, economic disparity, virile nationalism, and as Henry Kissinger observes, it must be able to “absorb six million people moving into the cities every year.”

As well as the problems created by this rapid growth, people have the wrong perception about the figures. For example, the economic growth rate has started to decline. In 1990 the growth rate stood at 9-10% but is now currently at 7% and predicted to fall even lower to 2% in the next couple of years. This could have a knock-on effect for the rest of the world causing the world GDP growth rate to fall. The main areas where the impact would be felt include not only commodities, but also consumer goods, including luxuries.

So where does the future lie for China and the rest of the world?

Firstly, investment in China has been inefficient, especially since 2008. Most of it has been restricted to infrastructure, construction and traditional industrial and extractive activities. The question is whether this reduction in investment can be achieved without damage to aggregate demand? The problems of restricted investment stem from emerging markets and, in particular, China. No emerging market is outperforming Citigroup’s forecasts* for 2015. China’s official numbers may look fine, but many economists reckon the real rate of GDP growth is currently 4% and may drop to 2.5% by the middle of next year. Relative to Chinese terms, that is a recession, especially after their last decade of almost constant double-digit economic growth. Furthermore, in terms of the rest of the world, China promotes high risks, since they recently overtook the U.S. as the largest trading nation. This means that, if they are not careful, China may open themselves, and many other countries, up to violent economic shocks.

In order for China to gain a dominant status on the world stage it must also become an innovative society - a society with an economy in a free market, producing goods and services where they have a comparative advantage.

China may find it difficult to compete against innovative giants such as the USA, but its current comparative advantage lies in commodity-based production and large-scale production. It has had tremendous economic growth, but that has not yet launched it on a trajectory of scientific revolution that led to the rise and ascendancy of the West. Nor does it have innovative and creative companies that could, thus far, rival Apple, Google, Twitter or Facebook. Given these challenges, China may not become the next superpower for a long time, some say not until 2050, because a superpower must develop a political democracy, economic freedom and high-tech creativity. In all these areas, China is playing catch-up with the United States, so it still has some way to go before we could begin to call it the next ‘superpower’.

 

Original illustration by Matt Buckley

James Routledge 2016