Superpower Denied? Why China’s ‘Rise’ May Have Already Peaked | The Diplomat
Superpower Denied? Why China’s ‘Rise’ May Have Already Peaked
August 09, 2012
By Minxin Pei
How a toxic mix of economic, demographic, environmental, political, and international challenges could end China's ascent.
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As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved. Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth. The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.
Short-term difficulties are not the least of Beijing's worries. In the coming decade, many of the favorable structural factors that have helped power China's double-digit growth in the past two decades are going to disappear. Topping the list is the demographics. The proportion of the Chinese population of working age peaked in 2011 and has started decreasing in 2012, according to a RAND study. At the same time, the share of the elderly in the population is beginning to rise rapidly. In 2010, 8.6 percent of the population was 65 and older. By 2025, the figure will likely be 14.3 percent. An aging population will increase labor costs, reduce savings and investments, inflate healthcare and pension costs — and slow down growth.
Another difficult obstacle ahead is environmental degradation. Beijing has neglected environmental protection for the sake of rapid growth. But the costs of environmental degradation have become unbearable, both economically and politically. Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP. China's long-suffering population has finally begun to fight vigorously for their environmental rights. This year alone, large-scale protests forced the government to cancel plans to build plants that would threaten the health and livelihoods of the residents in two Chinese cities. In the decade ahead, the combination of environmental degradation and the effects of global warming will further drag down Chinese growth.
The most serious long-term obstacle to Chinese growth is its state capitalist system. In the last decade, Beijing has largely reversed pro-market reforms and embarked on a decidedly statist developmental path. Consequently, state-owned enterprises have gained enormous clout in the economy and enjoy monopolistic privileges. The financial system favors such firms at the expense of private entrepreneurs. Household income, at 43 percent of GDP, is too low to support a higher level of consumption, a critical factor in rebalancing the Chinese economy and providing a source of future growth. Without systemic reforms, according to an influential World Bank study, growth in the coming two decades will fall well below 7 percent per annum. But reforming state capitalism is almost impossible politically because that will undermine the very foundations of the Communist Party's rule.
On the political front, the coming decade will likely be one of rising opposition against the party's political monopoly. Chinese citizens have become far more outspoken and willing to contest the party's authority. Despite the regime's huge investments in censorship, it now even concedes that the Internet has given ordinary Chinese people a powerful collective voice in shaping public opinion. Government policies across a wide range of issues, such as the one-child policy, budget transparency, education and healthcare policies, are being challenged for their reasonableness and legitimacy. Behind these developments is a fundamental crisis of legitimacy of the current regime.
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What this analysis reveals is that the growth of Chinese power under one-party rule has peaked. The seductive authoritarian state-capitalist development model may have delivered an economic miracle in the post-Tiananmen era, but for all practical purposes this model has lost its magic, if it has not gone totally bankrupt. However, China's future does not have to be a dismal one. The obverse of this analysis is that, with the right reforms, particularly a return to a pro-market growth strategy and a transition to democratic rule, China can comfortably confront these domestic and external challenges. A more liberal market-based economic system will utilize resources more efficiently and equitably than state-capitalism. Democratic reforms will give the regime a fundamental source of political legitimacy at home and also help reduce animosity and distrust of China abroad. China will have an excellent chance to lay the economic and political foundations for a 21st-century superpower. If this were to occur, China's best days would still be ahead, not behind.
