Will the 21st century belong to China? For a while, perhaps – but only in the sense that it was said to belong to Japan in the 1980s. Looking back now, that seems ridiculous, but at the time best-selling books were predicting that Americans, not to mention the rest of the planet, would be reduced to virtual serfdom by the relentless high-speed growth of the Japanese economy. Then it stopped growing.
Official data published on 16 August revealed that China’s economy has overtaken Japan’s this year, making it the second-biggest economy in the world. This followed last month’s announcement by the International Energy Agency that China is now the world’s biggest consumer of energy (and burns about half of the world’s total coal production).
Earlier this year China overtook Germany to become the world’s No. 1 exporter, and it now makes more cars than any other country in the world. Indeed, it makes as many as Japan and the United States together.
It has more kilometres (miles) of high-speed rail, more mobile phone users, and more wind power than anywhere else. As long ago as 2007 it became the world’s biggest emitter of carbon dioxide and other greenhouse gases. The milestones are zipping past so fast that it’s surprising that the Chinese are not suffering from a collective case of whiplash.
If the average growth rates of the US and Chinese economies over the past quarter century continue for another ten years (around 10 percent for China, and about 3 percent for the United States), then China’s economy will be three times bigger than it is today, and bigger than that of the United States. That’s the magic of compound interest. Better start learning Chinese, then.
But hang on. China is already the world’s second-biggest importer of energy (mostly oil and coal), and its biggest importer of minerals and other industrial raw materials. None of those resources is growing at 10 percent a year, or even 5 percent. If China’s imports of those goods grow at 10 percent a year, then the share of other countries must shrink.
China still has an export-led economy, and these other countries are its customers. If commodity prices soar because of ever-expanding Chinese demand for raw materials, then how will those other countries earn the money to pay for Chinese manufactured goods? So the Chinese rate of growth must eventually slow down – but when?
The straight-line projection of current trends would make the Chinese economy bigger than that of the United States by 2020. You can still find economic forecasts which predict precisely that, but it is striking that most of the economic consultancies that make such forecasts now suggest that China will not overtake the United States until some time between 2027 and 2030.
That implicitly assumes that China will shift to a much lower annual rate of growth in the near future: from 10 percent to only 5 or 6 percent. However, no organisation that is making a lot of money from the current orgy wants to spoil the party by spelling out exactly what might cause that sharp decline – so let us do it here.
Back in 1988, the last year of Japan’s 30-year boom, the land in the garden of the Imperial Palace in central Tokyo was allegedly worth more than the entire state of California, but that was just another way of saying "unsustainable property bubble." The bubble duly burst, bringing down the entire Japanese economy with it – and it has stayed down for the past 22 years, achieving at best 2 percent annual growth and usually much less.
The property bubble in China is reaching similar dimensions, with prices rising annually by 50 percent or more in dozens of cities. When property bubbles finally burst – and they always do – they tend to do a great deal of damage. (Nobody say "sub-prime".)
There is huge over-investment in China, often in state-sponsored infrastructure and housing projects motivated by considerations of "prestige" or by the opportunities they offer for cronies to make large sums of money. (That is what caused the slump in the smaller Asian "tigers" like Thailand and South Korea in 1998.)
China’s wage costs are going up fast, and lower-cost Asian producers like Vietnam, Indonesia and Bangladesh are taking away the labour-intensive goods like clothes and toys that once drove Chinese export growth. Meanwhile, at the upper end of the market, there is little of the genuine technological innovation that the Japanese economy was delivering towards the end of its boom.
The Chinese population is ageing almost as fast as Japan’s, and China is as resistant as Japan to reinforcing the dwindling workforce by allowing large-scale immigration. If the same inputs tend to produce the same outputs, then the Chinese economy is in big trouble.
That doesn’t necessarily mean that China also faces two decades of less than 2 percent growth. It does probably mean that it faces a very nasty slump in the next few years, followed by the transition to a permanently lower rate of growth. Not such a terrible outcome, really: it’s still an amazing success story. But it may threaten the regime’s survival, since its popularity (if that’s the right word) depends almost entirely on its record in delivering the economic goods.
By Gwynne Dyer