China: a new Middle Kingdom of the World?

A breakthrough

China’s economic miracle of the past four decades has become one of the most incredible technological advancements in the history. No other nation in the world has ever developed so rapidly in such a large scope.

Having happened over the life span of almost a single generation, the emergence of modern China as a new world’s power has become literally inconceivable. Establishment around the world: business owners, politicians, media - all those, who mostly create public opinion - are still struggling to fully embrace the overwhelming might of new China. As a result, misinterpretations of the new World economic order lead to deficiencies of national and global economic policies.

The news about economic success of China have become notoriously widespread. The second largest economy in the world (or the first measured in purchasing power parity) is far more advanced than any other nation in trade. Last year China made almost $870 billion in trade surplus. 40% of the entire surplus came solely from the trade with the USA.

Economic powerhouses of the world are now becoming dependent on trade with China[1].

The numbers are showing for instance, that Asian economies are gravitating toward China more. Having China as the main trade partner may lead in the long run to shifting their political course and preferences.

Got started as an export-focused economy back in 80th, China has now been successfully transforming its internal market. Unprecedented infrastructure projects mainly led by the Chinese government are now becoming an important driver of the economic growth and development.

⁃ Military

A series of latest publications at Reuter’s highlight an outstanding progress of China building its own ballistic missiles, navy and air force[2]. China has almost stroke a strategic defense balance with the Western world. Like in any other area of the economic advancement, China may soon double and triple the military capabilities of the US. Emerging military dominance of China is going to be one of the challenges for the Western world over the next decade.

⁃ Construction

The mere mentioning of the fact that China has become the leading construction power in the world, doesn’t look as impressive as just a number of stunning facts. In just 15 years China has built the equivalent of the entire European housing stock. Within roughly the same period, China has constructed 2.6M miles of paved roads and has currently surpassed the US by 50%. China is now operating the larger high-speed railroad network then the rest of the world combined.

⁃ Telecom

Recent US trade war with Huawei has deep economic roots. Chinese telecom manufacturers supply solutions to the domestic carriers that service by far the largest subscriber base in the world (China Mobile alone – almost 1 Bn customers). Being able to deal exclusively with the complexity and challenges of a billion-user network, Chinese manufacturers are getting a fundamental technological and innovative advantage over international competition.

⁃ Mass Surveillance

With all the negative social effect of the surveillance and social credit project, China is getting an enormous advantage by developing the extensive technology of image and face recognition. Recent news that China started to export its government surveillance technology are stunning, because with this technology comes the shift in political mindset of the national governments.

⁃ Space program

Recently, China has become the first country to successfully land a robotic spacecraft on the far side of the Moon. It is very indicative, how one of the experts characterized the China’s space exploration approach: "China is following its own motivations and interests rather than pacing its programme in competition with anybody else. China is determining for itself what it wants to do, not in any formal competition with the quite uncertain plans of anybody else."[3] “China will emerge dominant in outer space and establish its own legal frameworks benefiting its space industries”[4]

All these achievements are demonstrating clearly, that China has become an independent, mostly self-sufficient economic system.

Challenges for the developed economies

The rise of China creates a number of important challenges for developed countries.

⁃ De-industrialization of economy and loss of complexity

Massive influx of cheap goods from China creates structural imbalances in the developed economies. Traditional manufacturing industries are depressed. Attractiveness for business is limited because of the low margins. Reverse industrialization of the western economies, mainly US will be facing a lot of infrastructural difficulties.

⁃ Loss of the global market power

Many of the lucrative Chinese technology and service markets continue to be closed for the international competition. Therefore, the developed economies are not able to equally benefit from the growth of the Chinese internal market, as China does from the free trade around the World. At the same time, many developing countries are strategically leaning on China as their primary technology and development partner. Especially, these trends are pronounced in Africa and South America[5].

⁃ Growth of political independence of China

China’s increased political and military capabilities can be used in the future to lock some of the international initiatives to enforce lawful trade and entrepreneurship.

⁃ Financial challenge

To a great extent, many of the America-led global initiatives are debt-financed. The two major foreign creditors to the US government are China and Japan. With the continuous efforts of China to establish its own global financial ecosystem, the role of dollar as the main reserve currency will be disrupted. Sooner or later, American government will no longer be able to borrow money and cover the budget deficit.

Challenges for China

China’s industrial modernization has been primarily carried out by private companies. Starting from the early stage of the assembly production until the latest time of creating the modern Chinese internet economy, government contribution to the industrial breakthrough the has been minimal.

However, government has become the key beneficiary of the economic growth. Unprecedented trade surplus has been fueling the ambitious state projects. Over time, the government’s fiscal appetite is growing. Taken the nature of “democratic socialism” political system, Chinese government may go quite far with the manual control over the economy.

Importantly, nowadays it is very technologically advanced and it is playing equally with the private sector.

- Government led economy

The above is causing the first fundamental challenge for China: a conflict of interests between the dynamic private sector and the social and political ambitions of the socialistic state. Even with the increased fiscal pressure, Chinese businesses will still remain highly competitive. However, the room for maneuver will be shrinking.

- Global leadership

With the increased involvement in international affairs, China will soon become equally responsible with the leading world powers for supporting global political and financial stability, law supremacy, transparency and fairness of trade. Current political system of China is going to be in conflict with its new role of the world’s superpower. Shared responsibility with the West for the global institutions requires a great deal of trust. Nowadays, developed countries do not seem ready to delegate any of the critical global responsibilities to China, as it happened after WW2 with the US.

- Culture and ideology

As a new super-power, China will be challenged globally to propagate the attractive system of cultural values and ideology. Starting from the 16-17 centuries globalization has been predominantly a European phenomenon. Later in 19-20 centuries many international institutions have been extensively influenced by the English democracy, legal system, culture and linguistic. Chinese traditions of political and social life, as well as the Chinese culture are quite different from what is considered to be European standards. How quickly will the World be able to adopt the Chinese way? Will Mandarin become the second international language?

- Prosperity challenge

Rapid accumulation of wealth in China will soon bring structural issues of the developed economies. First of all, aging population and growing pressure of the social spending.

What’s next?

A standoff

The deepening standoff between China and US is now starting to get closer the Cold War scenarios. Of course, there is much less ideology in it nowadays. Instead, it looks like a direct competition for power and control over global institutions. China has enormous potential and advantage in economic efficiency. The Western countries have cultural unity and accumulated wealth. Rebalancing of the world geopolitical power will be the key global challenge of the upcoming decade.

Building its own world

Taken historical and political context of the China’s economic rise, and inherent lack of trust with the developed world, it is going to be unlikely that China will be able to take over the existing global governance. As a result, China will continue its ubiquitous efforts to build its own world. “One Belt, One Road” intuitive, Asian Infrastructure Investment Bank led by China and so on – all these are driven by the goal to build an alternative China-centric global financial and legal framework.

United Asia

Based on the cultural and geographical closeness, China will most probably continue its deep integration with the Asian economies, including Japan and Korea. Even now these two economies have larger share of trade with China than other developed countries. With the main economic growth happening in Asia, it is forecasted to produce 50% of the World’s GDP by 2050. So China will become the dominant power of the most dynamic and most populated part of the world.

[1] https://wits.worldbank.org/countrystats.aspx

[2] https://www.reuters.com/investigates/special-report/china-army-xi/

[3] https://www.bbc.com/news/world-asia-china-46745632

[4] https://thediplomat.com/2019/02/chinas-get-rich-space-program/

[5] https://techcrunch.com/2019/05/17/trump-huawei-networking-war/?utm_medium=TCnewsletter&tpcc=TCdailynewsletter