OPINION:
The world has watched with amazement as China sprints toward its goal of becoming an advanced economy. Average annual gross domestic product (GDP) growth of 10 percent over the last 20 years has raised hundreds of millions of its citizens out of poverty and transformed China into an economic powerhouse. The pace of its future growth will determine whether it will challenge America as a superpower. Will China sprint, crawl or stall over the coming decades?
“It’s tough to make predictions,” observed Yogi Berra, “especially about the future.” And it is doubly tough if the prediction period is very long because of the tremendous power of compounding numbers. Many recent studies of the world’s economic outlook contain GDP projections well into the future.
One such study, “The World in 2050,” prepared by global accounting and consulting firm PricewaterhouseCoopers (PWC), predicts that China will consistently exceed America’s 2 percent growth rate over the projection period. By 2050, says PWC, China’s GDP will reach $58.5 trillion and America’s only $34.1 trillion at Purchase Price Parity, a methodology that reflects the lower price levels in developing countries. But despite such rosy prediction, it is unlikely that China will achieve this dominant position because of the major challenges it faces.
An important contributor to China’s economic growth has been its demographic dividend, the steady increase in the working-age population due to favorable fertility trends. But this trend has run its course. The growth of the working-age population peaked in 2010 and is now reversing, with a 23 percent contraction by 2050, according to World Economic Forum. At the same time, China is aging at a fast pace. The interplay of these two factors has a powerful effect: According to a Brookings Institution study, for every Chinese over 60 in 2013 there were 4.9 people of working age. But by 2050, there will be only 1.6.
China got old before it got rich. The expected increases in pension expenses will strain a government budget that already spends 20 percent on caring for its elderly, its largest single expense. And older countries grow slower as they redirect resources from growth investments to pensions.
Another major problem is China’s $26 trillion credit debt (more than twice the size of the U.S. household debt) of which $2 trillion may be bad debt. Over the past decade, debt grew 465 percent to reach 247 percent of China’s GDP in 2015, up from 160 percent in 2005. This rapid increase in debt has helped maintain the high GDP growth, but return on investments has been steadily decreasing. Adding more debt to support growth will become increasingly difficult. Servicing the debt and dealing with the inevitable defaults will be challenging. And unwinding this debt will take decades and cause major dislocations.
Innovation might help growth. It has helped China’s growth so far through the “latecomer’s advantage”: China acquired, legally and otherwise, the world’s most advanced technology when it started industrializing. But now it must invent things itself. Its fundamental research will not help much, with only two Chinese universities among the world’s top 100 and none among the top 50.
Corporate applied research does not promise to be a major contributor, either, judging by the number of patents filed in the United States, Europe and Japan. Annual filings by Chinese firms have remained below 1,000 between 1991 and 2008, compared to 14,000 to 16,000 for American firms. The paltry pace of innovation has structural causes and is unlikely to change soon. State-owned enterprises control half of China’s industrial assets and two-dozen industries. Private companies have limited profit potential in these industries (which the government protects through regulation) and are, therefore, unlikely to invest in innovation.
The control of society by the brutal, corrupt and inefficient Communist Party is a further hindrance to growth. No large autocratic country has made it into the ranks of the developed countries because the distortions introduced by central control increase exponentially with the size of the economy. Singapore, Taiwan and South Korea, all autocratic countries during their growth phase, are much smaller than China. Furthermore, because the Chinese Communist Party will not relinquish power willingly we can also expect social and economic upheavals as the Chinese people try to gain their freedom.
Today’s experts who see China leading the world are as right as those who in the 1960s bet on the Soviet Union in this role, and in the 1980s on Japan. Given the obstacles in its path, China’s current sprint will turn into a crawl when it is not a stall because of social and economic convulsions.
America will continue to advance and maintain its dominant position. It has a growing, much better-educated and younger work force, a tradition of entrepreneurship and innovation, and superior universities and social institutions. America does have its own challenges, like high government debt and a strained Social Security system. But America will deal with these and other challenges much better than China can because of its vast wealth and vibrant democratic system.
• Dan Negrea is a New York private equity investor.
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