Why China Will Not Surpass the U.S. ( MUST READ)

Discussion in 'China' started by JayATL, Nov 4, 2011.

  1. JayATL

    JayATL Senior Member Senior Member

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    The received wisdom these days is that the West is in rapid decline, and China is on an upward trajectory that cannot be stopped. Sooner or later the pundits say, the two lines will cross-- perhaps explosively-- and China will rule the world. The latest evidence? Klaus Regling heading to Beijing on Friday to beg for Chinese financial aid to rescue Europe. It is certainly a long way from the foreign treaty ports and other indignities that China suffered at European hands in the last century... I wonder if there is a Chinese word for schadenfreude?

    I might have contributed modestly to the momentum theory of China's ascendancy myself with the 2003 article that David Hale and I wrote for Foreign Affairs, China Takes Off. To say that China is rising is one thing however, because that is undoubtedly true. To say that China will rule the world is quite another.

    An amazing number of Americans who were polled recently incorrectly believe that China's economy is already bigger than the US. The view from inside China is somewhat different. As any thoughtful person there will attest, China faces a slew of obstacles at this stage of its development. China might be a rich state, but its people remain poor. China may become the world's largest economy in 2016 according to optimistic estimates by the IMF, but that simply means that total output will be larger than in the US. A country with 1.3 billion people should have an economy larger than one with .3 billion in absolute numbers: China's population is more than four times larger. If both economies were exactly the same size, China's GDP per capita would be just 25% compared to the US.

    What this means is that in spite of the overall size of its economy, the standard of living in China is correspondingly lower. Just one example to put this into perspective: only 20% of Chinese people have flush toilets. The inescapable fact is that a world in which Chinese consume at the same rate as Americans is a world that cannot exist, based upon available resources of food, water, energy, and other commodities and products such as cars. It would require by some estimates four plant Earths. There is a natural limit to Chinese consumption simply because there are so many Chinese people. This might be unfair, but it means that the great majority of Chinese will not be able to enjoy the kind of life we live here in the US absent exponential and unforeseen technological progress.

    Demographics play a crucial role in terms of limiting Chinese growth and economic prosperity. China's population, similarly to Japan, is getting older. The difference is that the Chinese are not going to be as rich as the Japanese by the time that much of their population is over the age of 65. By 2040, assuming current demographic trends continue, there will be about 400 million Chinese elderly with fewer descendants to take care of them than in previous generations. According to a report by CSIS, The Graying of the Middle Kingdom instead of the current ratio of 6:1 working adults to elder dependents, by the middle of this century there will only be about 1.6 working adults for each elder. Due to the lack of job-related and government pension funding the end result will be that China's savings, upon which her wealth has been built, will erode. China faces a steady decline in its workforce beginning mid this decade, thanks to the One Child Policy.

    The elderly are also major consumers of health care services. The United States is the richest nation on earth, and has positive population growth, but we are still worried about being able to take care of our baby boomers in the future. In today's China, healthcare is at a premium, and many people in the countryside cannot afford any medical treatment-- full stop.

    According to a recent article in Foreign Affairs by Yanzhong Huang, The Sick Man of Asia, China's Health Crisis in 2006 80% of China's health care expenditures were funneled into the treatment of only 8.5 million government officials. Another amazing statistic Huang cites: more than 73% of Chinese hospitals have reported violent incidents between patients and healthcare professionals. Why? Because feelings run high when you are told that your child, your parent or your spouse cannot be given treatment because you cannot pay for it. China is worried about getting both old and sick: by 2040, more Chinese will be suffering from Alzheimer's than the total populations of all the developed nations combined.

    Health care is not the only area of concern. The Chinese government is aware that there is growing resentment of income inequality, the result of the introduction of capitalism and the wholesale abandonment of its social safety net. When I first went to China in 1979, the so-called Gini coefficient, the measurement of income inequality, was low. China was a truly socialist country and all services including housing were provided by the state. China in 2011, nominally and in fact politically still a communist country, has greater income inequality than the US.

    Someday China's 99% could be a truly potent force. China's leaders are worried about organized protests. There is no Twitter in China, as I recently confirmed with the co-founder of Twitter, Biz Stone. Facebook does not function, and the Internet and all online news is censored. Chinese citizens will increasingly face an asymmetric information gap as they struggle to compete with other large developing countries such as India, which allow the free flow of information. This is not an environment in which innovation can flourish. Try to imagine a Chinese Steve Jobs--almost all of the new companies in China today are derivative of US products, services, and business models.

    Examples of the limits of technological progress in the face of suppression of information can be seen in recent accidents involving China's showcase technology. The bullet train tragedy, the grounding of the new Airbus made in China, and similar events add up to an enormous glitch factor as China attempts to step up the technology ladder to more complex systems. Overheard comment--an inspector on the Shanghai's vaunted subway system will not allow his family to use their trains. Whenever there is an atmosphere of fear, bad news does not get reported up the command chain.

    Other countries are increasingly less willing to share their technology with China for a variety of reasons. Some businesspeople have had bad experiences, either in terms of political pressure (Google) or more commonly, theft of intellectual property. Lack of protection by China's legal system is cited as the number one structural impediment to foreign companies doing business in China. This all goes back to the ideal of creating an atmosphere in which ideas can flourish and R&D spending is rewarded through the stock market and other vehicles, a process that is not taking place in China today.

    Small business, the cradle of job creation everywhere, is at a lending standstill in China. Most small and medium size businesses are forced to go to the black or "informal" lending markets for funding, with interest rates of 20, 30 and 40%. Chinese banks are equipped to funnel loans to the large state-owned businesses, but they do not have credit analysts who can determine whether or not a business should be given a loan on its own merits. The languishing stock market is still dominated by behemoth state-owned enterprises, so when startups need capital, they often turn to foreign investors. In spite of the glut of savings within China's banking system, all of China's major Internet firms raised funds in US stock markets--Sina, Sohu, Alibaba. Lack of access to capital has also resulted in the loss of thousands of Chinese engineers and entrepreneurs who decided to come to the US to start their businesses, to the inestimable gain of Silicon Valley.

    Another common misperception is that China will overcome the US militarily. First of all, China has no major allies, with the possible exception of Russia, which clearly seeks to protect its own interests first and foremost. The US on the other hand has firm global allies, military bases worldwide, and a navy that girdles the earth. Secondly, in today's world, warfare is all about technology, and in spite of its successes with rockets and satellites, China is still handicapped in this area. Finally, there is the question of political will. China will fight to protect its interests in Taiwan and in Tibet. But other than that, North Korea has proved to be a major albatross, and there is another strong power in the region, Japan, which will do everything it can to check China's military ascendency.

    All of this is not to say that China isn't the greatest success story of our generation. It is a land and a people I love dearly, a civilization whose history and art are unparalleled in many respects. But there is no predetermined place for China to regain on the world stage--history is that simple. When you next read about the "end of America" or China's "inevitable" domination, put on your skeptical spectacles. In spite of the visible, flashy wealth of its modern coastal cities, China is still very much a developing economy on the brink of major changes. Its current system of centralized non-democratic government might be perfect for implementing unpopular choices such as joining the WTO, a decision that was estimated to cost 50 million jobs at the time. The question is whether China has been able to use its wealth it has gained since joining the WTO to create institutions that can bring longer-term stability.

    As China is transitioning to become a full member of the world community from which it was entirely separated just forty years ago, we have perhaps seen the end of Chinese rather than American exceptionalism. The characteristics that allowed China to make enormous progress to date are not necessarily the qualities that will be needed to create productive global integration going forward. China is already our greatest commercial partner, and the US should do everything it can to encourage China's engagement, including eschewing trade barriers of all kinds. Overly optimistic misinformation about the realities China faces can lead to poor decision-making by our own government officials. The bottom line is that we should not fear a strong China. Rather, we should fear a weak China.

    What are the steps China should take? It should implement a path to full convertibility of its currency and open capital accounts, end financial repression, promote income equality and access to social services, allow the free flow of capital and information across and within its borders, promote freedom of expression-- all these changes and more need to be executed carefully and with all deliberate speed. With a leadership transition looming, the Chinese ship of state now requires a captain who recognizes that China's future depends on integration rather than exceptionalism.

    I believe that being China's leader at this time in history just might be the toughest job on earth.

    Lyric Hughes Hale: China's 99% -- Why China Will Not Surpass the U.S.
     
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  3. cir

    cir Senior Member Senior Member

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    Only time shall tell.

    I for one give the US 5-7 years for staying atop economy wise.

    The loss of the rest, such as military power, technology lead, being a result of economic might, will just follow.

    If history is any guide, the US has started a long march on a slippery down path.

    It is precisely the US' political system which will ultimately undo the so-called only superpower.

    Attacking Iran should be the defining moment.

    Let's sit back and enjoy.
     
  4. Tianshan

    Tianshan Regular Member

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    the article is mostly true.

    even if our economy becomes bigger than the USA, that does not mean we will be more powerful.
     
  5. asianobserve

    asianobserve Elite Member Elite Member

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    And it will not change the fact that most rich Chinese still want to live in the US or Canada!
     
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  6. asianobserve

    asianobserve Elite Member Elite Member

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  7. pmaitra

    pmaitra Moderator Moderator

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    JayATL,

    Please take some time when posting the opening post. 'Foe' means enemy; I think you meant 'for' in the title, right?
     
  8. JayATL

    JayATL Senior Member Senior Member

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    really FOE= enemy? I never knew - I thought FOE was another way to spell FOR and FOR was another way to spell FOUR! ...:p
     
  9. pmaitra

    pmaitra Moderator Moderator

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    You probably spend too much time reading graffiti near Atlanta 5-Point Station. ;)
     
  10. jat

    jat Regular Member

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    If the economy of China's surupases that of the United States and there is no doubt it won't, it will mean China will have the largest defence budget in the world. A potiental problem for Russia, Japan and India. Its immediate neighbors.
    Although defence R&D of China's is behind even Russia's the vast amount of it will bring rapid growth and change in the future. Imagine by 2020 or 2030 that China's GDP is bigger than the United States. Does that mean we will see a China with 8-10-20 Carriers?
     
  11. nimo_cn

    nimo_cn Senior Member Senior Member

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    Must read for every American, so that they will relax and be nice to China. Anyway, China is not gonna surpass you, why do you need to contain us?
     
  12. JayATL

    JayATL Senior Member Senior Member

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    :p hahahhaa
     
  13. JayATL

    JayATL Senior Member Senior Member

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    democracy with any other name still stands for democracy! :p as citizens of the world we welcome them to our " democratic " principles where ever ...
     
  14. cir

    cir Senior Member Senior Member

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    Bubble?What bubble? In the age of inflation, cash is scrap paper. Chinese are smart people. They use cash to buy homes. The value of these homes will increase in tandem with time. Not the paper dollar the value of which is going downhill like there is no tomorrow. Property bubble? What bubble. Yes, there might be empty flats and houses and villas up and down the country, but they are mostly bought in cash. No leverage there. These homes are safe bets that will be exchanged for more liquid assets in the future, at good prices! After all, China has just made a start on the urbanization process which will bring millions of rural people to the cities, old or new, in the coming decades.

    Those who "worry" about China should worry about their own bloody business. Chinese are capable of taking care of their own business.

    America Fiddles While China Surges

    By Steve Clemons

    I'm in China this week and have had limited internet access (and time) to post while bouncing between meetings and cities. I'm here as a guest of the China-United States Exchange Foundation and traveling with a great group including MSNBC's Jonathan Alter; ThomsonReuter's new acquisition the kidnapping-defying David Rohde; National Public Radio's managing editor David Sweeney; and Daniel Gross, now at Yahoo Finance and author of one of the most fun and counter-intuitive books I have read on economic history, Pop! Why Bubbles are Great for the Economy.

    I personally think that the US has overdone its bubbles and is now paying a heavy price -- but Gross' book is still a stimulating and important take on innovation and how it works.

    There are probably significant economic bubbles embedded in China's political economy -- I just can't find them. Some argue that the entire country is a bubble, or a ponzi scheme, that will collapse the moment China has a really bad year. Very few of the people we have met here have been able to navigate the question of what happens if the great numbers we keep having recited to us about improved water quality, more good air days, surging levels of year on year economic performance, more patents issued, all in accordance with primary targets in the 11th 5-year plan.

    China's bank reserve requirements are 21%. These must be among the highest reserve levels in the world. Housing prices are falling at the moment as the government is working to rein in speculators -- but the fall off is minor and it is not creating a cascading spiral downward as over-leveraged real estate holders dump holdings. Most second, third, seventeenth homes bought by China's new rich, who the Chinese are beginning to call "the golden collars" are bought with cash full board -- no leverage.

    The odd thing as that many of these homes sit vacant as many Chinese who buy more homes as investments don't want to spoil the home with renters -- and when they sell, they want to sell them new. The indifference to rents shows to some degree how under-leveraged some key sectors may be.

    Carnegie Senior Fellow Michael Pettis has one of the best blogs in the China-watching business and his work would be good to troll through for those digging into the China bubble question.

    My gut at the moment is that as the renminbi continues to rise, China will do what Japan did after the September 1985 Plaza Accord after which its currency significantly rose and begin to collateralize more of its assets and expand China-directed manufacturing capacity all around the world. Japan experts Karel van Wolferen and R. Taggart Murphy provide some of the best late 1980s/early 1990s chronicles of Japan's global expansion fueled by a strong currency. China's global diversification could make what Japan did look trifling.

    It's a cliche of course, but China is big -- it has such huge scale and discipline that it can move its bulk impressively fast towards national objectives.

    I have many friends who worry about America's ability to compete with China and are concerned about Chinese mercantilism. I worry about these issues as well and have since the early 1990s. Many are late to the worry box.

    But what I find few Americans who poke at China want to answer is what would they do differently if they were driving the helm of China's economic machinery. Chinese industrial policy, education policy, innovation policy, investment policy, trade policy, and more are models that the US could learn from, or remind itself about.

    America simply doesn't tend to its interests in the nationally cohesive way that I see here in China -- where problems abound, and probably corruption. The State probably makes too many of the decisions in China -- but still, China is moving and the US, in contrast, seems stupidly paralyzed.

    If I see another industrial park in China with a basketball court sized model of the successful development of one of some eighty different national development zones, I feel like I want to push a pencil through my head. It's all impressive, all looks successful -- but my frustration is not with hearing for the seventh time a routine script offered by the very nice hosts of these industrial, high tech, and software parks -- but in my own lament that one just doesn't see much of this anymore in the United States. Maybe in Raleigh-Durham. Perhaps in Rio Rancho and Wichita -- but very few places.

    We visited Applied Materials' impressive solar panel and semiconductor equipment manufacturing R&D facility in Xian today (yes, where the Terra Cotta warriors hang out), and a data point that just shows what a steep hill China has climbed -- and what a challenge faces the US in its renewable industries and jobs objectives -- is that approximately three years ago, China had about 5% of the global solar production capacity. Today that figure is 50%. And if one adds Taiwan, the figure is closer to 70%.

    Three years. This is Andy Grove/Gordon Moore fast -- and this is China's "government" moving that quickly in partnership with industry.

    By contrast, the paralysis in Washington -- the inability to move a serious jobs or infrastructure plan not only in Obama's recent legislative effort but since he came into office -- assures that America is quickly forfeiting opportunities, growth, and its role as the cutting edge of the global economy to China. America needs to wake up.

    Nov 3 2011, 7:15 PM ET 7
     
    Last edited: Nov 4, 2011
  15. Ray

    Ray The Chairman Defence Professionals Moderator

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    If by largest democracy you mean India, well, the issue is willIndia be ready to accept them?

    That is the million dollar question and not the millions the rich Chinese have.

    Largest democracy

     
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  16. asianobserve

    asianobserve Elite Member Elite Member

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    What do you mean, are you saying that India is not yet a true democracy?
     
  17. maomao

    maomao Veteran Hunter of Maleecha Senior Member

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    In my last company there were Chinese employees/university graduates who were working for us; and they were planning to settle here as they saw more IT and Consulting opportunities here in India than anywhere else. There goes your false assertion.

    There are thousands of Chinese laborers in India who work here.....what about them?

    We have had Chinese settlers settling in India for 1000s of years this is evident by many China towns in India.
     
  18. nimo_cn

    nimo_cn Senior Member Senior Member

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    Well, the difference between the largest democracy and the richest democracy is that the former one is poor and the latter one is rich, hence it is more accurate to say at least they are wishing to emigrate to a rich state.
     
  19. nimo_cn

    nimo_cn Senior Member Senior Member

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    How about inviting them to DFI so that we will know how they think about India?

    By the way, we are talking about rich Chinese.

    They are working there, i doubt they are willing to settle down.

    Right, that is 1000 years ago, but we are talking about the current situation, any proof that Chinese prefer a democratic India to a totalitarian China?
     
    Last edited: Nov 4, 2011
  20. nimo_cn

    nimo_cn Senior Member Senior Member

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    I guess you are saying that as an American. Trust me, Chinese as well as all the other immigrants ( including Indians), are flocking to America because of the prosperity it can provide, not because the democracy it always boasts. If America is as backward as India, it has no charm at tall.
     
  21. nimo_cn

    nimo_cn Senior Member Senior Member

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    Not ready? In which aspect? Isn't India already the largest democracy, that should have attracted Chinese who desire for the taste of democracy?

    Ray, no one on this forum is more articulate than you. As articulate as you are, you fail to come up with a better defence for Indian democracy. Anyway, how could that be accomplished as your own people are moving out of India?

    A master piece published by NYTimes
    Why I Left India (Again) - NYTimes.com
     

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