“it seems to be widely assumed that China will take over as the world’s
next superpower in the next ten to twenty years”

Since 1945 we in the West have lived in an America-centric world. Is this about to change, and does it matter?

Judging by the amount of newsprint, books, and kowtowing trips by businessmen and politicians, it seems to be widely assumed that China will take over as the world’s next superpower in the next ten to twenty years.

We might think that this will have little impact on our daily lives. But history would suggest rather the opposite. The dominant economic power in the world has always also been the dominant military and cultural power. Taking two empires as simple evidence of the military-economic-cultural axis, just think of Rome, and remember the ‘what have the Romans ever done for us?’ speech in Monty Python’s Life of Brian; or of the lasting influence of Britain on its long-gone colonies in terms of language, law, infrastructure, education, and institutions, if thankfully not in food.

Thus, if we do believe that China will overtake the US economically, we have to expect substantial changes to our lives, from the language we speak, to what we watch on TV, the way we vote, and the way our laws operate.

What are the facts? At current rates of economic growth, America will have been economically overtaken by China sometime in the 2020s, and the baton of global leadership will have once again been passed, just as America took Britain’s earlier in the twentieth century.

Perhaps, at least economically that baton has already been passed. China is now America’s creditor to the tune of US$1.2 trillion dollars of US government bonds, up from US$867 billion dollars a year earlier.

While America’s economy seems moribund, China grows its GDP by 10% each year. While America’s politics are paralyzed and partisan, China has a generally competent, technocratic government. While in the West we fret about falling education standards and widespread social malaise, China is filled with hundreds of millions of education-hungry, city-migrating, motivated, cheap workers. What investment advisor isn’t telling his clients to load up on all things China-related?

But, before we start our Mandarin lessons, it is perhaps worth questioning quite how inevitable this all is.

For a start, we need to accept that we are ludicrously bad at predicting the long term. Who can put their hand on their heart and say that either they (or anyone they read or knew) predicted that in 1989 our geopolitical world would be transformed by the fall of the Berlin Wall? Who called this year’s Arab Spring for that matter? Who in late seventeen century Europe would have predicted that wet, wool-exporting England rather than the might of France or the vast trading empire of the Dutch East India Company would be the leading colonial power in the world a century later?

For the rest of this article I’ve tried to look at some of the formidable challenges that China faces. In each case the historical precedents are unflattering to China. That does not mean that China will not become the next superpower, but it certainly isn’t going to be an easy journey.

For a start, China faces a demographic time bomb that will make Japan’s current malaise look like a stroll in the park. It will be the first country ever in history to get old before it gets rich.

China’s population is aging fast due to the One Child policy. In 1970 6.6% of the population was over 60, and 39.6% were under 15. The median age was 19.7. In 2010, 12.3% were over 60, while 19.5% were under 15. The median age was 34.5. According to the latest estimates by the United Nations Population Division, by 2030 24.4% of the population will be over 60, and 14.6% will be under 15. The median age will be 42.5. China’s working population will peak in 2015.

Why does this matter? Because more and more of each worker’s income will have to go to support the aged population. In a country with very limited pension provisions, the drag on the economy from supporting the aged may be crippling. Some demographers talk of the 4-2-1 problem where one young adult must support two parents and four grandparents. GDP growth will likely slow to a snail’s pace, while government debt to fund this huge number of old people (397mn by 2040!) will be crippling.
Rising life expectancy will only compound this problem. Currently China’s life expectancy is only 73 years. This is likely to trend towards 80 due to improvements in healthcare and diet.

If we contrast this to the demographics of other empires, the differences are startling. The population of England rose from less than 10 million in 1801 to 30 million in 1901, acting as a vital engine of domestic growth. In 1871 the average English woman was having 5.5 children. In China the number is 1.54. And since English life expectancy was 45 years for men in 1900, the few that did make it to retirement were a small burden on a proportionately large labour force.

As an aside, if the aging problem is not enough of a demographic issue, sex-selective abortions of girls have created a historically unprecedented imbalance in the young Chinese population between boys and girls. Specifically, in children under 15, there are 1.17 boys for every girl, or an excess of over 18 million boys. As these boys hit their twenties, one cannot but see the imbalance as anything but a disturbing problem.

Another challenge which could break China entirely is environmental, especially food and water. Let’s start with water. According to Wikipedia, China’s per capita water is only one quarter of the world average. Half its major cities face water deficits. Much of the water is contaminated by pollution and the run-off of fertilizers. Already, water shortages are creating urban-rural tensions, which are only likely to worsen.

China’s water solution is to dam rivers and build huge canals to transport water to the arid north. But this is creating tensions with many of its neighbours such as India, Thailand and Vietnam. For a nascent geopolitical superpower, robbing your nearest potential allies of their water is a high-risk strategy.

Even more alarmingly, China is an agricultural weakling at the best of times. It has 22% of the world’s population but only 7% of the world’s farmland. Wealth and western cultural influence mean that the Chinese are consuming more meat, but beef takes 7kg of grain to produce 1kg of beef.

So the demands on the land are intensifying at exactly the point when the water that irrigates 70% of Chinese farmland is shrinking. A global superpower that can’t feed itself seems unlikely.

If we use the road map of history to compare the dominant economic powers of the past, we can see that Britain’s emergence was significantly influenced by its agrarian revolution that gave it an excess of food, freeing up huge numbers of workers to move to the great Northern manufactories. Likewise, the opening of the vast wheat fields of the mid-West directly influenced America’s growth, as it enabled her to absorb the millions of immigrants on which her greatness rests.

Next up, China’s lack of industrial raw materials makes it an unlikely world leader. In contrast, Britain’s industrial revolution was driven by its remarkable luck in sitting on top of a vast supply of easy to reach coal. America’s economic growth is unimaginable without its huge mineral and oil wealth.

China is a large and increasing importer of almost all its key raw materials. China imports 63% of its iron ore, the key ingredient in the production of steel. China currently imports about 50% of its oil, or 4.3 million barrels per day. According to forecasts from the US Department of Energy, China’s oil demand is expected to rise by 1.2 million barrels per annum, while its domestic production is only expected to rise by 150,000 barrels, meaning it will become ever more dependent on imported oil.

China has recently been scrabbling to close the raw materials gap by making investments overseas, particularly in Africa. Without on the ground military support, these investments are fragile. We can expect an increase in proxy wars. But fundamentally, since the US Navy controls the world’s sea lanes, such import dependence leaves China very weak.

Turning to more controversial matters, China is shockingly un-innovative for its stage of economic development. Yet genuine innovation, rather than copying seem to be hallmarks of an emerging economic leader.

Looking at the US, we can see an incredible explosion of innovation in the last twenty years of the nineteenth century and early years of the twentieth, including major consumer brands, the supermarket, the airplane, Hollywood, and the mass production of the automobile. All were well under way at a time when its economy was still smaller than the British Empire.

Likewise, a trip to London’s brilliant Science Museum will show that many of Britain’s agrarian and industrial inventions were achieved at a time when Britain was still a relative economic minnow. Some economic historians believe that the creation of the Bank of England in 1694 gave Britain an edge in Europe’s interminable wars by allowing it to borrow more efficiently. This was decades before Britain could be considered the world superpower.

We see nothing like such innovation in culture or business in China. What Chinese consumer brand can we even name? And don’t fall back on the old argument that Japan was also known for shoddy goods in the 1960s, as it was already making dramatic progress in technology, and brands like Canon, Sony, Panasonic, Sharp, and Toyota were well-established.

There is a logical reason for China’s lack of creativity. It is not worthwhile for Chinese businessmen to invest in brands or inventions when they cannot be confident that the rule of law will protect their efforts. While China is now paying lip service to protecting intellectual property, it is still inconceivable that the ruling Communist Party will allow any institution or person to have primacy over itself, and thus, innovation will remain stifled.
Without innovation in products or brands, China can only be a low cost, low wage economy. Yet, wage inflation is continuing. At the moment, China is still highly competitive, but will that last? Ten years of 10% wage growth, versus 2% wage growth in the US, and we’ll see.

We are already seeing some companies bringing production back from China as spiraling labour costs combined with higher western productivity and increasing transport costs no longer make outsourcing so compelling. Perhaps we are close to an equilibrium where further Chinese wage inflation and/or renminbi appreciation will actually make the US and Europe competitive again?

Another possibly coincidental but interesting idea is that all great civilizations are stimulated and enhanced by massive immigration and intermarriage. The persecution of the Huguenots in France brought invaluable skills in weaving and banking at a critical time in Britain’s development. Britain was also a great beneficiary of regular waves of Jewish migrants. Clearly the US would be nothing without immigrants. But it is equally true running backwards through Holland, Venice, Florence, the Abbasid caliphate, Byzantium, Rome, and Greece. In marked contrast, China is remarkably mono-cultural.

In conclusion, it is my belief that we will continue to live in an America-dominated world for at least the next half-century. But the developments that I have outlined in China should still be of great concern to us. The first and most important implication is that China will need to get militarily aggressive as its demand for food, water, and raw materials becomes critical.

Secondly, as China’s growth drops off, the Communist Party’s pact with the people of ‘don’t rock the boat and we’ll all get richer’ is likely to break down. Yet the party is unlikely to give up its power easily. As it loses legitimacy, the struggle could lead to civil unrest and factionalism of the type that crippled China during the Taiping rebellion of the nineteenth century or the 1911-1949 period.

Thirdly, we should not write off America yet (or Britain for that matter). China’s growth for the last twenty years was on the back of ludicrous low wages and minimal environmental controls. As these gaps close, we ought to see a relative resurgence in our economies.

And if I’m wrong, and China does become the world superpower in 2025, at least the food is better than the last two great empires.

Sources (just for your information):

China demographics: United Nations Secretariat www.esa.un.org/unpd/wpp/index/htm. 

British demographics: ONS.

China sex ratio: Index Mundi.

Meat vs grain statistics: Brown, Renner, Flavin: 1998: The Environmental Trends that are shaping our future.

US treasury data from www.treasury.gov the US treasury’s official website. Data is as of May 2011.

Comments are welcome