Should America Root for a Reforming China?

Xi might try making the PRC's economy more competitive. Good for the U.S.? It's complicated...

At the national level, many commentators focus on gross domestic product (GDP) and the fact that, if Beijing’s statistics can be believed, China could match the United States in GDP by 2025 or even earlier. GDP is an annual measure, like a salary. To know how rich a person is, we don’t just look at a year’s salary. Similarly, to know how rich countries are, we have to look at all the assets they have, not one year’s output.

This is captured by wealth, not GDP. Credit Suisse has been estimating cross-national wealth for a while and their October 2013 report put total Chinese wealth at an impressive $22 trillion, just behind Japan’s. American wealth? $72 trillion. There are challenges to measuring wealth and, most likely, the Sino-American gap is not that large. Perhaps it’s only $40 trillion or $35 trillion. Regardless, it is immense. China has a long, long way to go to be in the same league as the United States.

And without reform, it will never happen. A lot of people have fallen in love with the PRC’s model of state-led development. In fact, it’s been a failure, something the Party will implicitly acknowledge at its big meeting.

At the end of 2002, China had implemented twenty-four years of market-oriented reform, capped by joining the World Trade Organization. An extremely poor country had become much better off, if still poor, and the prospects were good for continued gains. China’s economy was balanced between investment and consumption, debt was low, and ecological damage was considerable but not seen as crippling. Reform had succeeded brilliantly.

In 2003, a new government took over and the PRC implemented a new model, where state banks lent far more money to state firms, heavy industry rapidly expanded, and excess production was dumped on world markets. The result has been soaring debt, much more environmental devastation, and an unbalanced economy headed back to socialist levels of investment dominance over consumption.

Absent the mistakes of the past ten years, the PRC would face the daunting challenge of an aging labor force. If Beijing continues to insist on wasting huge amounts of money and trashing the environment, rather than enhancing labor flexibility and permitting real competition, growth will continue to slow. Then it will stop, even if government statistics pretend otherwise.

In other words, if China doesn’t reform, it will stagnate. Not today, not tomorrow, but soon, and possibly for the rest of our lives. A failure to reform drops China back to the pack, just as with Japan and the Soviet Union before. This would leave the United States as the undisputed world leader for decades to come (unless we repeatedly shoot ourselves in the foot, which is a story for another time).

This scenario is probably enough for many Americans to hope for Chinese reform to fail. Fair enough, but there’s a downside here too. If PRC stops growing by the end of the decade, it will still be big—second only to the United States, if well behind. It will still matter a good deal to the world, especially to Asia. And it may be angry.

Chinese Communist Party cadres are not a friendly bunch. They’re afraid of any alternative organization, including old people doing stretching exercises. They’ve siphoned off for themselves hundreds of billions of dollars in wealth. Their grip on power has inevitably rested on repression to some extent, but it has also rested on economic success. If that success disappears, what will the Party use to hold popular support?