America Should Not Psych Itself Out Over China's Rise

January 6, 2020 Topic: Security Region: Asia Blog Brand: The Buzz Tags: ChinaXi JinpingMilitaryGreat PowerNational Security

America Should Not Psych Itself Out Over China's Rise

China is far from unstoppable.

This demographic pressure has yet to bite, but it will in time and irresistibly so. According to United Nations figures, China’s working-age population will decline from some 70 percent of the total population today to 60 percent by 2030 and 57 percent by 2040. The number of workers available to support each retiree will drop from about 8.5 today to only 3 by 2030 and to barely over 2 by 2040. This shortage of workers will limit the pace of China’s economic growth by imposing a constraint on a crucial economic input in ways that robotics and AI can only partly remedy. The shortage of working taxpayers relative to the dependent retired population will strain China’s public finances even though that country is far less generous to its elderly than are the West and Japan. Still more, the relative labor shortage will push up Chinese wages, stealing from that economy a key basis on which it has supported its export-oriented growth strategy. Recently, Beijing rescinded its one-child policy and now allows two per family. Even if Chinese families respond quickly to this new freedom to build a family, it would take some 20 years before the adults of that effort flowed into the workforce, a long time to wait for a nation bent on world dominance. 

Beneath all these problems lies China’s most significant shortcoming: its top-down approach to economic management. This huge weakness has only just begun to show itself, but it will become increasingly evident as China moves to more advanced stages of development. 

China’s approach was less of a problem while its economy remained largely underdeveloped. Then, China’s needs were clear—among them roads, rail links, power generation, and an expansion of other utilities. It was easy for top-down planners to set objectives. As Beijing’s planners channeled the cash surpluses from trade in these directions, the nation enjoyed a huge payoff. China’s by now legendary growth and the country’s stupendous gains in wealth speaks to those returns. But as the economy has developed and become more complex, it has become more difficult to discern future directions. Top-down planners will face increasing difficulties in identifying where to direct the economy. China already offers abundant evidence that planning has failed as often as it has succeeded, perhaps more often. Top-down direction has built subways, rail lines, and even whole cities that remain underutilized. Worse than the resources wasted on these white elephants is the debt accumulated from the huge amounts of spending. Recent World Bank estimates put China's debt burden at the equivalent of $12.2 trillion, more than three times the size of China’s GDP. These underutilized projects have no ability to earn sufficiently to retire this amount. 

To be sure, all economies generate waste by pursuing failed ventures. But in more market-oriented arrangements, where the centralized direction is less of a factor, such failed ventures tend to be less grand than in places like China. What is more, less centralized economies tend to test many directions at once. Some fail, and the result is money lost and resources are wasted. But those that succeed foster growth that more than make up the difference for the economy as a whole. China, however, has none of this diversity of effort. If its top-down direction succeeds, the payoff is huge, and these successes have frequently dazzled Western reporters and commentators. But as China’s economy gains complexity and becomes harder to predict, those huge projects will increasingly miss the mark. They will produce bigger losses and still more waste. And with little diversity of effort, China will continue to lack the means to make up for the losses. 

The Western media looks at the extent of past Chinese development effort and stands in awe. Seldom in the United States or the West, except in times of war, donations marshal resources as China has for its great top-down efforts, either in city construction or space exploration or whatever. Take, for instance, China’s landing on the dark side of the Moon, where no one has gone before. China has announced that on the moon there are great reserves of helium-3, which is extremely rare on Earth. Evidently this isotope can enhance the energy gains of a nuclear reaction, offering an abundance of carbon-free energy. China has plans to mine it on the moon and acquire an effective monopoly for this wonderful stuff on Earth. It sounds impressive, even frightening for those in the United States. But if it fails, because of transport expenses or still more likely because of the development of alternative technologies, China will carry still more debt and suffer still more waste. True, if a nation and its people venture nothing great, they will accomplish little that is great. But China’s top-down approach ventures on only a few things at a time. They had better work well, or the economy will suffer greatly. 

None of this says that China will return to its former backward state. Nor do all the weaknesses imply that this huge nation will be anything less than formidable—in either economic, military, or diplomatic terms. China is already formidable on all these levels and will no doubt remain so. Grit and determination have allowed nations to overcome worse handicaps than China faces. At the same time, this review of China’s vulnerabilities should make it clear that China is far from overwhelming. The United States and the West generally need not, as some have suggested, simply accept ultimate Chinese parity and perhaps dominance. China’s huge ambitions are far from inevitable, or even likely. Western determination and grit, as well as a far superior economic system, should ensure that America and others have no need to bow to China, that they can manage the challenge of the Middle Kingdom short of the military confrontation that no one but a few Chinese generals and admirals seem to want.

Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.

Image: Reuters