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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.

thanks andrew. I am not agree with some of the points. First, The world is cyclical. So no one can maintain the first place for a long term. Second,china has much better way to rule the world rather than colonial or invading which was always used by the western countries. learn some chinese history, you will found a lot of scenes like today’s political world. Third, in chinese belief, culture is the Predominant force rather than economic and military. Unfortunatelly, the latter two factors which were used by western and dominated the world in the past two or three hundreds. However, no superpower based on economy or military can survival for a long term as andrew argued except the culture. Fouth, in chinese culture, harmonious produce win-win, combat generate lose-lose is the main principle. Just calculate how much wealth has been grabbed by almost all the developed countries from china, you will be surprised that how china can recover in such a short time.So if the western world is not hostile to china, china will be definately a qualified friends, participant, even a leader for the world. By the way, from the current financial crisis, perhaps people should rethink that who are the real dominaters of the west countries and social system in the past two centuries, is it general public, politicans, intellecturals or some evil big fishs hide in the business and social world.

Posted 26 March 2009, 17:11 by Kevin, P.
An intelligent debate by people a lot more educated and informed than me. However, in my simplistic view China is patiently transferring the world’s manufacturing capacity to China. I predict that once the tipping point is reached, the rest of the world will become suppliers of raw materials and buyers of manufactured goods. China will be come the price setter. If the rest of the world tries to recreate their own manufacturing capacity, China will be able to counter that with predatory pricing.
Prediction two. This massive industrialisation will eventually do irreversable harm to China’s land, water and thus its people. The less densely populated parts of the world, Australia, New Zealand, Africa, South America etc will be compelled for humanitarian reasons, or by economic blackmail, to accept enormous numbers of Chinese citizens whose environment was destroyed to meet the material needs of the rest of the world.

Will this happen? I will never know because it might not happen in my time.

Posted 26 March 2009, 15:07 by David
Dear Andrew;

I believe that whether China will reach no. 1 country in the world does not matter much since we are considering one single indicator of a country’s wealth – GDP. Numbers got be understood into a holistic context, especially when we are talking about macro-economic indexes related to complex living organizations like countries.

And I am not able to see any sort of economic domination that is not backed-up by a robust military force. Today (Mar/26th) on the news you can find that the Chinese reacted with angry on a Pentagon’s report claiming that China is altering the military balance in Asia (http://news.bbc.co.uk/2/hi/asia-pacific/7965496.stm). Not to mention the repressed Tibet issue.

In the seek for untapped natural resources China is moving to the world’s last economic frontier: Africa. So, I wouldn’t be surprised to witness some kind of modern neocolonialism in this continent. As well as their predecessors, China is also using wide accepted tools (FDI, Bilateral Agreements,…) to maneuver under the current economic and political schemes. To stick with today news, Australian regulators just accepted the bid of Chinalco for RioTinto’s assets and convertible bonds.

rgds.;

R.M.P.

Posted 26 March 2009, 14:09 by R.M.P.
I would generally agree with the article. I lived in HK and worked in China during the mid’90’s. Companies had visions that if we showed up to sell our products to 1.2b people we would see nothing but rapid growth. It didn’t happen. You only had to go beyond the cities to see why. As you rightly point out most projections have some nice stair stepping upwards year on year growth for the Chinese market. For me, the telling number is the GDP ranking of 106. For any product beyond basic needs you have a much smaller market place then most people project. It still amazes me that when people look at new market entrances they do not look at the numbers you have provided. My industry is finally coming to grips with the fact that China is not developing as they thought it would and it is costing us a lot of money. The recent recall incidents let alone pollution issues etc…show there are many hurdles to over come. And with as many as 200m migrants, some who may or are being sent home as the factories close, the progress achieved to date could all come to a halt if there is civil unrest. I would disagree with one point and that is the comment on military dominance. I agree they will probably not march an army into other countries but economically they may invade countries like they have in Africa and dominate without military hardware. A recent example maybe the refusal by South Africa to give the Dalai Lama a visa. I can’t help but wonder if the Australians would debate a Swiss company buying into Rio Tinto. Owning x % of a countries natural resources may have the same effect as stationing your army on someone’s border.

Posted 26 March 2009, 12:55 by Rosanne Bachman
China is an amazing country. Rich and fertile with history, with it’s family structure focused on the future. There is merchant thinking that has thrived for thousands of years. As to where it goes from here, I believe it is uncharted ground. This fusion of Eastern and Western thinking is creating a new world of business. Both ways are teaching each other. These are pivotal times as the balances tip. Where history can usually dictate a higher probability of outcome, the sudden influx of money and power may change everything. Even the most highly entrenched values are susceptible to modification. It is my belief that growth will plateau in the next 3-5 year and we will see a shift in governmental structure. I do not believe that it will grow horizontally in proportion to it’s vertical growth, and may, subsequently topple in some areas.

Posted 26 March 2009, 12:44 by Tania Rodrigues
Andrew,

Good take!

But it seems like you are gauging and marking the rise of China under the assumption that China will continue to play within the set rules of the past 50-60 years of American economic clout. The fact is everytime a new nation or economic bloc that is on the rise finds itself fettered by the existing rules, it gives birth to NEW rules and a new order.

My point is if China continues to rise in all the above mentioned aspects – they will have a reserve currency. And WB and IMF wouldn’t matter anymore for they will be replaced by other institutions based off Honkong or Singapore.

Posted 26 March 2009, 12:15 by Brahmaprakash
china is trying hard in creating relationship first world countries and third world countries and also looking at it’s weakness in areas of education by sending it citizens to universities which is highly boosting nation level of innovation later creating globalization

Posted 12 March 2009, 08:49 by jackson mutebi
Both historically and culturally, China has never been taking an aggressive roles overseas, and in such a big country with a such a big population,we have tried very hard to feed the whole country , not to mention to reach an abundance life style across the board throughout the whole country ! So,I donot see any possibility that China will be taking such an aggressive roles overseas.

Culturally, the country is introverted and donot have the time for overseas expansion…..and as such,the world is becoming more and more integrated , I am only aware that we are going toward a truelly one global nation in the long run .

When examining the Chna issue, one has to examine the cultural and historical aspects of China rather than the economic dimension of China…and only by this dimension, you will be 100% sure China will only add positive and productive elements into the peaceful development of global integration rather than global confrontation.

If you really want to examine the rise of China and its possible impacts , I believe you have to study the Chinese cultures, phiposophy and its history…then you will be able to derive a better and balanced perspective of this great country.

Posted 9 March 2009, 06:04 by k.s.au

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