Five Myths About China

Less economic might than some think—but more military power than some expect.

The third plenum of Chinese Communist Party Congresses is often the time when the country’s rulers introduce major policy shifts. The Eighteenth Party Congress in November and, crucially, implementation over time of policies announced there offers the U.S. an opportunity to reassess China, to see whether top leaders Xi Jinping and Li Keqiang are interested in pursuing reform or will hew to the course of their predecessors.

This opportunity could be wasted if the persistent myths that have long plagued American views of China are not dispelled. The key myths feature overstating Chinese economic prowess and understating clashing security interests between the China and the U.S.

Myth #1: China is well on its way to surpassing the U.S. economically

Reality: China is far from surpassing the U.S. and can do so only if helped by our failures.

This is the generative myth, from which the others flow. In less than a generation, the world economy is supposed to have a new leader. China will purportedly be bigger than the U.S., the first time the American economy has not topped the world in well over a century. This is said to follow just by projecting Chinese and American GDP growth forward.

This is wrong on multiple counts. First, GDP is not nearly as important as commonly thought. It is not a measure of economic well being, it is misleading measure of annual domestic output. It discounts imports, no matter how vital they are, and counts government borrowing as always positive, because only the current year is relevant. Because it is merely an accounting device, changes in GDP do not cause anything—employment, inflation, nothing.

One year of production is not “the economy.” A much superior notion of “the economy” is the stock of national wealth—all the assets we have accumulated over time. The stock of American private wealth in 2012 was about $70 trillion. Using the same methods as with American wealth, the stock of Chinese wealth is $20-25 trillion, through government ownership of assets and control of prices make that a very rough estimate. The absolute size of the gap between the U.S. and China may approach $50 trillion. It would take decades to erase.

Or never. The other part of China passing the U.S. is extrapolation. China’s economic performance from 1945-1978 meant very little to its economic performance from 1979-2012. And 1979-2012 is likely to mean very little to 2013-2046.

One obvious reason is demography. China was a young country with an expanding labor force when market-oriented reform was initiated in 1978. The two factors fed each other: the market found opportunities for all and the raw number of workers pushed the rate of economic expansion higher. Now China is middle-aged and headed quickly toward old. The number of people age 60 or higher is expected to double from 2010 to 2030, past 350 million. Even the most brilliant policies will be less successful under these conditions.

The same is true for physical resources. Relentless demands from urban development and heavy industry have erased arable land, polluted water, and overwhelmed local supply of energy and metals. Imports are available, but China’s own stock of resources has been depleted and water shortages, especially, cast a shadow over sustainability.

Other sources of economic growth are capital and innovation. China reports investment spending $1.5 trillion higher than the amount of investment that actually contributes to annual GDP. Some of that is due to accounting differences but hundreds of billions of dollars are wasted annually. Across a range of sectors, Beijing mandates that state-owned enterprises must lead. This leaves neither them nor the small private firms that might challenge them much incentive to innovate.

America is richer now, will be younger soon, has more in the way of resources, and is more innovative. China will not close the wealth gap unless we squander our advantages with irresponsible fiscal, monetary and regulatory policy.

Myth #2: Having not fought a war since 1979, China’s military hasn’t recognized the important changes caused by high technology.

Reality: The People’s Liberation Army (PLA) is a modern force, emphasizing quality for the past two decades.

The Chinese military has been carefully observing the conflicts of the past two decades, and has focused on improving quality, even as it remains the largest military in the world. To put it simply, this is not your grandfather’s PLA.

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