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

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