Is China's rise inevitable?
Is China on the brink of eclipsing the United States as the world's economic mega power, with the yuan taking over from the dollar as the global currency, and China able to exercise financial, military and political hegemony? Or is China's economic growth about to slow dramatically to 3 per cent a year as the country is forced to change its growth model?
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, believes that the rise of China is unstoppable and so is the decline of the US. On the other hand, Michael Pettis, an economics professor at Peking University, predicts potholes and twists ahead in China's development, along with 3 per cent growth in the near future.
Subramanian writes from the safe distance of Washington. Earlier this year, he contended that on an accurate purchasing power basis, China's economy may already be bigger than the US. Now he carries his argument further in an article in Foreign Affairs to be followed by a book later this month, projecting the rise of China and the decline of the US, with dire consequences ahead for Washington.
He makes a good point about the importance that economic power offers, including 'the ability of a state to use economic means to get other countries do what it wants or to prevent them from forcing it to do what it does not want. Such means include the size of a country's economy, its trade, the health of its external and internal finance, its military prowess, its technological dynamism, and the international status that its currency enjoys'.
He has developed an 'index of dominance' using three factors - gross domestic product, total trade and the extent to which a country is a net creditor to the rest of the world - with data as far back as 1870. Subramanian acknowledges economic distortions which will cause China's economy to slow, including an ageing population, overly cheap capital leading to excessive investment, an undervalued exchange rate and subsidised energy.
However, but he forecasts growth for China over the next 20 years of an average 7 per cent a year. For the US, Subramanian says 2.5 per cent a year is feasible, more optimistic than the 2.2 per cent forecast of the Congressional Budget Office.
It is not difficult to do these sums: even if the US is a bigger economy now, it won't be for long. By 2030, Subramanian predicts, China will be much bigger, with 20 per cent of global GDP, against 15 per cent of the US. Even in per capita terms Chinese income will be a respectable US$33,000, more than half that in the US. In trade, he forecasts, China will be still more dominant, generating twice as much as the US, while China's muscle as a creditor will be important. Forget a multi-polar world, writes Subramaniam: this will be China's uni-polar globe.
Pettis' perspective, informed by actually living and working in Beijing, is different. In a blog dated August 28 and devoted to a number of predictions on a worldwide basis, he forecasts that Chinese consumption, an almost unthinkably low 35 per cent of GDP, is set to fall.
He says this will happen in spite of growing official recognition about the dangers of China's economic imbalances. He notes: 'Low consumption levels are not an accidental coincidence. They are fundamental to the growth model, and the suppression of consumption is a consequence of the very policies - low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates - that have generated the furious GDP growth [in China].'
He comments that for all its unease, Beijing has not acknowledged that it needs to change its growth model. So, Pettis predicts, for the next 15 months Chinese debt levels will rise quickly in spite of attempts to slow their growth because Beijing is focusing on specific areas, not on the overall tendency to produce debt. As in a game of whack-a-mole, local government spending will be reined in, but will appear in other guises, such as locally-controlled state-owned enterprises (SOEs).
'By 2013-14,' Pettis forecasts, 'Chinese GDP growth will slow sharply, and by 2015-16 predictions of a sustained period of growth rates at 3 per cent or lower will no longer seem outlandish.'
In spite of this, he disagrees with economists who believe that China has to achieve growth of more than 8 per cent in order to maintain full employment, and thus social and political stability.
Pettis says that even growth of 3 per cent would be acceptable if - and it is clearly a big if - the growth is better balanced. If China gets away from its heavily capital-intensive model - 'wholly inappropriate for such a poor country' - and sharply reduces free credit to SOEs and local governments and makes credit available for small and medium-sized enterprises and for the service sector, both of which are more labour-intensive, then China can happily live with lower growth without social or political upheaval.
The big political question is will China try to rebalance its economy? Pettis argues that China 'has no choice unless it has infinite borrowing capacity and the world has infinite appetite for Chinese surpluses', but he also admits that 'the elites that benefit from economic distortions are traditionally the ones most likely to prevent necessary adjustments, and if they actually run the whole show, adjustment can be incredibly painful and disruptive'.
The year in which China's economy is likely to overtake the US, according to the International Monetary Fund