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THEWORLDTODAY.

ORG DECEMBER 2010


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CHINA George Magnus, SENIOR ECONOMIC ADVISER, UBS INVESTMENT BANK AND AUTHOR, ‘UPRISING: WILL EMERGING
MARKETS SHAPE OR SHAKE THE WORLD ECONOMY?’ JOHN WILEY 2010, WILL BE SPEAKING AT CHATHAM HOUSE ON DECEMBER 14

UncertainLeap
Forward
Is this the Chinese century, and will Beijing again dominate the global system
as it did from before the birth of Christ to roughly 1800? These weighty
questions have received additional impetus in the wake of the devastating
financial crisis and its tough and protracted consequences for the United
States and other western nations. The contrast with an economically and
increasingly politically self-confident China could hardly be more stark.
Yet, global futures cannot be projected in the linear and apolitical form,
which many employ. There are serious challenges ahead for China.

t HE COMPREHENSIVE REFORMS UNLEASHED BY DENG XIAOPING IN


1978 set China off on an explosive path to become America’s
main geopolitical rival, the world’s second largest economy, its
biggest exporter and its major creditor with over three trillion
dollars of foreign financial assets, or the equivalent of three
quarters of its gross domestic product (GDP).
By 2030, on current form, China’s GDP will overtake the US, possibly a bit
earlier. Income per head of population, which has trebled in thirty years to

A P P H OTO/ G R EG B A K E R
THEWORLDTODAY.ORG DECEMBER 2010
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about $3,700, could reach $13,000. With the west in post- But the country’s legal, social and other Communist Party-
crisis economic and political disarray, China’s enormous subservient institutions will be put to the test by the enormity
impact is very clear nowadays on neighbours and the world of the economic restructuring ahead.
system. What could possibly go wrong in the increasingly In a nutshell, the issue is about whether the Party is willing
common refrain that the future belongs to China? and able to give citizens political, as well as economic, rights,
To answer this question requires impossible foresight. But and whether in today’s rapidly modernising economy, rule by
we should consign linear thinking to spreadsheets, and try to law can substitute for rule of law without thwarting or
understand the consequences and flashpoints resulting from distorting economic development.
economic and political processes. From a fairly long list of
topics, five seem to stand out: Risk of a Bust
Fourth, the government’s legitimacy rests on a sort of
Ageing Fastest informal social contract based on the continuous delivery of
First, China is an emerging market oddity in demographic eight to nine percent economic growth. But a slowdown could
terms. It is not the oldest, but it is the fastest ageing country on occur for a variety of reasons over the next decade and beyond.
earth, and by 2050 it will be older than the US on every major These include the demographic transition; the exhaustion of
demographic measurement. From now on, China’s youth and past achievements, such as high literacy and school
working age populations are going to fall, and those over 65 enrolments; high prices for food and raw materials as a result
will soar. Put another way, there will only be 2.5 workers to of the country’s voracious demand; environmental
support each older citizen, compared with ten today. constraints; and, more immediately, the growing risk of a
The one-child policy is an important, though not the property and asset bubble produced by excessively loose
only, factor contributing to this enormous demographic exchange rate, monetary and credit policies. This is not to
transition. The consequences include slower economic argue that Beijing faces a bust any time soon, but that if it
expansion, and growing social problems as a result of keeps treading the current path, then the risk will surely grow.
chronic gender imbalance. Many wonder whether China
will grow old before it gets rich. Global Tensions
To avoid such an outcome, China will simply have to get Fifth, China’s increasing status as a world power is already
richer more quickly, but this entails a significant shift in the generating global tensions. When a Chinese craft recently
sources of economic growth – and vested political interests – rammed a Japanese fishing boat off the disputed Senkaku
from companies to consumers, and from coastal provinces to islands, the Japanese Foreign Minister wondered whether we
hinterland and rural areas. are now starting to see the ‘essence of China’.
Japan and several other countries have been concerned about
Innovation Culture China’s behaviour in embargoing so-called rare earth metals,
Second, the demographic transition makes it even more used in high technology products, and over which it has a virtual
important to sustain high levels of technological achievement. monopoly. India has been vocal about Beijing’s economic and
China is a big fish already in the information, low carbon, political activities in Asia at what it regards as its expense.
clean air, and automotive technologies. Among local ‘winners’ China’s maritime build-up in Asia has the United States
are Baidu, the local Internet search engine with eight hundred and regional allies on alert. Its reconstruction of a
million subscribers, Alibaba, the privately owned e-commerce commercial-political Silk Road into the Middle East and
on line retail and cloud computing service, Geely Holdings, Africa, and even Latin America, may be less colonial and more
which bought Volvo, and Huawei Technologies, the country’s driven by the need to secure access to crucial resources. But
largest network and telecommunications equipment supplier. for many it is sometimes hard to tell the difference.
Nevertheless, using and developing modern technologies is These geo-political tensions are liable to get in the way of
not the same as having a deeply rooted culture of innovation and high levels of international economic cooperation and
entrepreneurial transformation. You can certainly create world mutually beneficial policies. In the last two years, increasing
leadership in the production of screen-based goods and green trade protectionism has been one of the consequences, and
energy products and processes along the Yangtse Delta, but this more recently, currency wars, restraints over the movement of
is not the equivalent of a Silicon Valley, which thrives on capital, and blatant acts of corporate protectionism.
adversarial conflict in innovation, proprietary ownership of If the G20 group of developed and emerging countries, but
processes, patents and copyrights, and the absence of hierarchy especially the G2 nations, America and China, are unable to
and political interference. reverse this tide and establish a proper framework to address
their contrasting interests, no one would be a winner. But the
Rights And Law economic and political consequences for China would come
Third, China’s soft underbelly historically has been the as a rude shock to the consensus.
relative weakness of its institutions and their ability to nurture In 2012, China will change its leaders, and US voters will
and promote change. Perhaps size matters here. It is a lot have the opportunity to do the same. The challenges faced by
harder to govern a large civilisation without a controlling, and the world’s largest creditor and debtor nations,
sometimes repressing bureaucracy than it is a nation state. separately and together, are equally significant.