The Eagle and the Dragon

Alexander Pannett 7.07am

The recent prediction by the IMF that, using purchasing power parity, China will overtake the USA as the world’s largest economy by 2016 has left many fearful of the coming century.  In Hay-on-Wye, where I spent last weekend hiding from rain clouds, there was much talk of the impact China will have on the world as it exerts its new economic strength.  China will certainly change the dynamics of world power but behind its fearsome economic achievements lie some dangerous weaknesses that may prevent the Middle Kingdom from ever truly usurping America as the world’s foremost power.

China’s economic growth in recent years has been staggering.  By some measures, China is already the world’s largest consumer of energy and accounts for half of the world’s growth in oil demand.  The World Energy Outlook report has predicted that China’s energy demand would jump 75% between 2008 and 2035, contributing 36% to the projected growth in global energy use.

China’s neighbours have had much to worry about recently from the rising dragon.  China has built its first aircraft carrier and has already modernised its blue water navy with submarines and destroyers.  It is becoming much more assertive and has made bold territorial claims over the South China Sea, stretching as far south as the Spratly Islands near Brunei.  Chinese coastguard vessels routinely detain Vietnamese fishing boats in the disputed waters.  In 2010, a Chinese fishing vessel rammed a Japanese patrol boat off the disputed Senkaku Islands.  Japan’s refusal to release the Chinese captain led to China imposing a de facto ban on rare earth materials to Japan.

However, China’s impressive annual growth rates of 8% to 10% hide some very high environmental costs that are already starting to have a huge impact.  Years of unrestrained industrial polluting has wrecked the water supply, with rivers full of toxic metals and chemicals.  Agricultural land is suffering without access to safe water.  Increased water use has led to shortages and and desertification in north China.  This is particularly serious in a country that is already 30% desert.  More than half of China’s 660 cities suffer from water shortages, affecting 160 million people.  The tremendous cost of this worsening environmental damage has likely been unaccounted for in China’s headlong growth rate raising speculation that it is much smaller than currently forecasted.

Chinese economic growth is coming to the end of a cycle.  Global demand of cheap products cannot keep pace with the growth of China’s industrial output.  Whilst China’s middle class has exploded in size, domestic demand will not be enough on its own to maintain China’s current growth rates.  An even bigger problem is that there are simply not enough resources in the world to support a Chinese population that would have the same consumption levels of the American population.  The Chinese economy will need massive restructuring away from low end manufacturing if it is to deliver the wealth that will rival the United States.

China also has a huge, looming demographic crisis.  The one-child policy may have been successful in slowing Chinese population growth but it has meant that China will soon have a very large elderly population.  People above the age of 60 now represent 13.3% of the total population, up from 10.3% in 2000. In the same period, those under the age of 14 declined from 23% to 17%. This will create significant welfare costs for the government and will require younger workers to pay disproportionately for the costs.  This will further dampen economic growth.

The political structure of China is much weaker than the one party imagery would let outsiders believe.  Transfer of power between generations is conducted via a lengthy, Byzantine process of committees and personal loyalties.  It can often take five years for a new president to finally weed out their predecessor’s supporters from positions of power.  This does not leave much influence or time for a president to control the teeming multitude of 1.3 billion Chinese, let alone consider an effective and consistent foreign policy.  With growing calls for political reform, independence movements in Tibet and Xinjiang and anger over environmental and economic issues, there is much internal instability that hampers China’s ability to exert itself on the world stage.  It says much about the true fears of the Chinese leadership that for the first time in March 2011, China’s internal security spending trumped that of its defence spending.

Whilst China has certainly become an economic power and will be a future superpower, there are many structural flaws to overcome before it can be secure enough to exert its weight in global politics.  Considering its weaknesses, it will be hard pressed to usurp the USA as the foremost world power, even if its GDP becomes the largest on paper.  Besides, this is assuming that America will continue to grow at its recent negligible economic rates.  As the most innovative, capitalist nation on earth, with still unparalleled intellectual and economic resources, it cannot be long before the eagle answers the dragon’s challenge.

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