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When China is no. 1

By Andrew J. Nathan

26 February 2009

Of the many factors that will shape the world economy in the coming decades, none is bigger than the rise of China. Today, China is the world’s fourth-largest economy in dollar terms. By most projections, China will be number one sometime within the next 30 to 40 years.

But historically speaking, China will be a very new kind of number one. China’s dominance will be based neither on technological supremacy nor on an ability to colonize other nations. Rather, it mainly will be based on demography: China will be the biggest economy because it will have the biggest population. On a per capita basis, China will still be poor relative to other economic powers for the foreseeable future.

This picture may be at odds with the conventional perception of China as the rising juggernaut. But let’s first put its economy in perspective. It is true China has achieved decades of breathtaking growth. It now ranks at or near the top in terms of foreign-exchange holdings, trade volume, and inflows of foreign direct investment. But even at number four, China accounts for only 6 percent of the global economy, equal to about two Californias. On a per capita basis, China sinks further. It is 49th in foreign-exchange reserves per person. It is 92nd in exports plus imports per person, and 106th in GDP per person. Lacking a reserve currency, like the US dollar, China cannot set the parameters for commodity prices, inflation, interest rates, or stock prices around the world. Nor can it call the shots in the World Bank or International Monetary Fund.

Indeed, given its size, China’s most important contribution to the rest of the world now and into the future will be to take care of itself. Its ability to satisfy most of its own needs—in energy, grain, and cotton—is crucial to world price stability. The gradual growth of its economy helps the rest of the world remain stable. Economic growth helps keep China politically at peace, avoiding a breakdown that could saddle the rest of the world with refugees, public health problems, and transborder crime problems spilling out of China into neighboring countries. In a sense, then, big as it is, China remains a supporting player on the global economic stage.

China’s ascension could be derailed by domestic instability or global economic shocks, but assuming that it does become number one, what will it mean for China’s place in the world?

Unlike other number ones in history, China is not likely to be the world’s leader in technology. To be sure, its economy has advanced technologically. Its high-tech and military industries are continually improving, its export industries are moving up the value chain, and China’s national research institutes are reaching for the global lead in biotechnology, particle physics, and other fields. But unless the other high-tech nations stop competing, China will not surge ahead of them in a wide range of fields to become the global fountainhead of technology like 19th-century England or the 20th-century United States, because while China advances, other nations will advance and keep the lead in many fields.

Nor will it dominate militarily. Although China’s economic size will give it an ever-growing appetite for oil and other raw materials, it will not be able to gain energy or commodity security through conquest the way the colonial powers did in the 18th and 19th centuries, or through indirect neocolonial control as the United States did in the 20th century. Barring the collapse of other strong powers, there will be no power vacuum to expand into, nor will China in the foreseeable future have the kind of military lead to force its way to supremacy. Neither conquest nor domination is an option. China will have to get hold of the resources that it needs through economic means.

That means that China’s prosperity will remain interdependent with the prosperity of its global rivals such as Japan and the United States. A large part of China’s wealth will still come from selling labor power through manufacturing, and this will require trade both to import energy, materials, and components and to export finished products. China will not get ahead if its rivals do not. The decline or destruction of other countries will not help China. This is all the more so as globalization has intensified interdependence around such issues as climate change and public health. Clearly a richer China will have a growing stake in a peaceful world. To be sure, disorder around its borders could tempt a Chinese military response, but from China’s point of view intervening militarily will be a distant second-best to trading peacefully with its major sources and markets.

Still, top status will confer special influence on China as it has on other economic leaders in history. China’s way of doing business is already having an influence around the world, including the emphasis on personal relationships rather than contracts (often shading over into corruption) and the role of government in managing the market and favoring chosen enterprises. As China regulates its domestic market—whether it’s in health standards, packaging, M&A, or rules for stock offerings—companies around the globe will find it efficient to accommodate operations to those standards. As the “Beijing consensus” evolves, world businesses will evolve to keep up with it.

Less tangibly, we should expect to see a Sinicization of global culture through the influence of Chinese consumers’ tastes. Clothing styles, food flavors, the design and packaging of global brands, music, sports, and entertainment will respond to the draw of the Chinese market. More and more, we should expect to see our youngsters studying Chinese from elementary school. Moving to Shanghai or Beijing to start a career will no longer be an exotic adventure.

What about the longer term? Will China sustain its status as number one? If so, can it eventually gain technological and military leadership and seize superpower status? That is very far in the future, but one should be wary of straight-line predictions. China’s rate of growth is liable to level off as it becomes a mature economy, so the current disparity in growth rates will not continue forever. Besides, technological and military power are relational. China will only forge ahead of others if the United States and its allies do not continue their own technological and military growth. China will almost certainly become the world’s largest economy, but number one status won’t confer as much power as it did in the past.

Comment [28]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

There is no way for everyone in the world to enjoy the type of extravagant life style currently enjoyed in the west. China’s as well as India and Brazil’s success in bringing prosperity to 3 billion people will have to be done by taking away the fat currently staching up in the west. We should see a healthier and equal world if they are successful, or we may see conflicts and wars due to resistance by the status quo.

Posted 28 March 2009, 06:45 by Frank liu
I feel something is lost in article, I mean people. What will happen, after forming new huge knowledge workers in China? Do the communist party leaders decide alone for China future? It seems China will face with a human right movement, and this will change many of the prediction. Please do not forget we are talking about a country with a big poor people. Their role will determine China future.
best regards

Posted 28 March 2009, 00:24 by Reza Rahimi
Mr. Nathan,

Great article full of insight. I agree on most points. I’ve often raised the issue as to whether today’s superpowers could ALLOW China’s per capita GDP to even approach that of, say, the United States or even Portugal’s. That would be cataclysmic on many levels not the least of which is whether the planet could support such a massive economy. The thought of 1.2 billion people each earning $40K per year is daunting.

China’s demographics are interesting. I’ve read that the society is aging rapidly and its worker/dependent ratio is sliding quite quickly.

I don’t agree with your point that China can control commodity prices. China is a large net importer of woodpulp, recovered paper, copper, ferrochrome, cobalt and even carbon steel (despite being the #1 producer). Chinese companies with the support of state-owned banks are making massive investments in raw material companies. Witness Chinalco’s $19.5billion injection into Rio Tinto (pending), Minmetal’s bid for Oz (recently blocked by the Aussies), China’s winning bid for the largest copper reserve in the world in Afghanistan, their investments in tungsten in Portugal and Vietnam and their activities in central Africa’s mining/metals industries.

So, if that’s not controlling commodity prices I don’t know what is!

Posted 27 March 2009, 08:39 by Dave P
Dear Andrew,
great article, even though of course China is not a monolith.
But: “Less tangibly, we should expect to see a Sinicization of global culture through the influence of Chinese consumers’ tastes. Clothing styles, food flavors, the design and packaging of global brands, music, sports, and entertainment will respond to the draw of the Chinese market. More and more, we should expect to see our youngsters studying Chinese from elementary school. Moving to Shanghai or Beijing to start a career will no longer be an exotic adventure.”?

Maybe I have a biased European point of view, but all the things you describe are already happening: Youngster all over the Western world wear Chinese characters as tattoos on their bodies, a variety of Chinese foodstuff can be found in any European supermarket, the number of European school children studying Chinese and students going for internships – and careers – to China is exploding.
The Chinese rock star Cui Jian was in Kingston Town last month, bringing Chinese influences into the Reggae scene of Jamaica. So Sinicization is already happening!

Posted 27 March 2009, 03:58 by profarlt
There is no doubt about “Nothing succeeds like success”.
But I feel long term growth is a function of factor endowments,skill set of the employees and productivity, research and development, infrastructure, strong institutional background. China’s manufacturing ability and the strong will power is unquestionable but the country lacks in
(a) Robust Financial Sector
(b) Laws protecting intellectual property
© Privatisation
(d) Corruption prevails
(e) Technology or high end products

I fully subscribe to the fact that the speed with which china nas climbed up the ladder is really commendable. More important question is how far the steep growth is sustainable?

Posted 27 March 2009, 01:41 by Kalika Bansal
The world should face the ascension of China for its monetary strength in term of personal bank savings or national dollar storing backed up by the Chinese Government positively. The truth is in the front, regardless the ambition inferred in the passage that China is grapple with No.1 in the world, China is doing the best to help American and even the rest of the world to go through the financial crisis.

Admittedly, history is cynical and spiral into advance periodically, China has the potential to compete its place with its own way. China may not have interest in playing the “universal police” intervening other country’s politic, economic, etc. What it struggles for is its own wealth and leaders’ domination, considering historical facts. The same as China, States is also a big nation in the world. At the same time China taking care of itself, should the State do the same to itself? If it had done so, there may not come the overwhelmingly miserable crisis.

Posted 27 March 2009, 00:55 by Huiyun Meng
The discussion of China as a homogenous entity, with a single set of goals, and a single set of attitudes to the outside world is somewhat misleading.
The fact that China has a single party of leadership does not mean that it only has one opinion on the best way forward. The Chinese government contains various factions; socially progressive, conservative, economic reformers, nationalist, maoist, etc.. There is a dynamic relationship between these factions and it is nigh on impossible to predict with accuracy which will hold sway over the next ten years never mind fifty years. The metropoli of Shanghai and Shenzhen are very different from the provincial towns of Shijiazhuang and Zhengzhou and will always give rise to different leaders with different goals.
What will move the global debate on is to break down some of the stereotypes and to help foster understanding of the reality of China in all its diversity from the Christianized mini-Singapore of Wenzhou to the mulit-lingual mini-Bangalore of Dalian.

Posted 26 March 2009, 21:44 by Windy
Excellent exchange. I believe China has no interest in becoming the 1st, 2nd or 3rd. They want to be amongst the big countries simply because they are big and deserve to belong there. They want to be taken into account in world affairs, but mainly they want to be able to do business and trade. I do believe that they will soon reach high in technological innovation and research. They are training their human resources. China has no interest in dominating or controling other countries, as many other participants observe. Outside their borders they have two major concerns: Taiwan and Tibet.
China, India and other emerging economic powers want recognition and understanding.
Jocelyn Henriquez Venezuela

Posted 26 March 2009, 20:59 by Jocelyn Henriquez
Surely Chinese is not a aggressive group, but the way of doing business such like “Guanxi” or personal relationship is really harmful to build up a sound business. Contracts could be the most efficiency way today and many Chinese business persons worry about the abuse of Guan Xi in business as it doesn’t reflect the the rational choice the deal should have.

BTW,China now are undertaking reform to construct a new societal welfare system in order to boost confidence of consumers and domestic consumption, if it is successful, everyone in the world would benefit from the business opportunity from it as now the consumption per capita there is really low due to relatively high Engel’s ratio.

Posted 26 March 2009, 20:15 by Kelen
I believe that China has real chances to become the next No 1 due to the following reasons:

Economy: it has grown continuously in the last 10 years and it continues to grow.

Mentality: they are highly motivated to become No 1, they trust in themselves and they are working hard to make it real.

Innovation: they managed to become an El Dorado, a place that attracts bright minds looking for exceptional experiences, and they are also investing in educating their children.

Politics: they are silently building a political network with countries underestimated in the Western world, but that might oppose a strong force if united.

However, the end of the game depends on all competitors. If current competitors will make mistakes, China will surelly be there to take their place. On the other side, if China makes mistakes, she will not be forgiven.

All that we can see for the moment is that China is rising, while US is declining. In the middle, Europe is neither having it’s best moments.

Posted 26 March 2009, 17:41 by Diana Huiu

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