There is much debate about China's rise to supremacy particularly when it comes to being an economic superpower. This has been highlighted by their taking the number two spot from Japan, their massive global reserves and their dauntingly large population. The theory goes that it is not a matter of if China will become the next economic superpower but when? Some say that this will happen by 2020 but I have to admit that I find that hard to believe and in all honesty I do not see them as an economic threat for at least the next 20 years. My reasons are numerous and in this blog I will list what I see as sufficient hurdles to becoming an economic superpower that will hinder any meteoric rise into the world's premier economy.
Certainly they have the population size and drive to get it done. They also have a vast pool of cheap labor and this too will allow growth however underneath this large population is a very troublesome issue - the one-child policy. This policy was introduced in 1978 and has remained in effect through today. According to reports this has reduced China's population growth by more than 400 million. The main problem with this limitation is that by 2020 China will have a baby boomer style population with more of the population in the 35 and above age category than below. This starts to become really top heavy by 2030 as you can see in the chart below and we have all seen the problems associated with supporting a large ailing population with a smaller younger population.
For an example look no further than the stresses that are being placed on social security and Medicare in the US and you can see that this will result in the first problem to China's financial resources in the relatively near future. This will also have a large effect on the wage rate as less workers will be required to do the same amount of work and pricing power will start to shift to the labor force creating a problem for their manufacturing machine. Already wage rates are creeping up and, based on this demographic shift, look to continue to accelerate into the future slowing the mainstay of their growth - their manufacturing competitiveness.
The next issue is the lack of economic transparency. The press is full of reports of trademark and intellectual property theft. Until this and the laws of the country are cleaned up and considered protective to the investor there will not be enough trust to become a global superpower. Sure plenty of money is being poured into the country to take advantage of the country's burgeoning rich population, but that cannot translate into an economic superpower until the laws protect investors and there is a safety net of transparency.
Investing in Europe or the United States comes with risk but there is a level of trust that while certain individuals may try to swindle the investor that overall the market is honest and regulated plus there is a vast amount of transparency particularly when it comes to government debt. Do not get me wrong, I still believe that a lot of the numbers are manipulated on either side of the Atlantic but at least there is some form of accountability and liquidity to the market whereas there is always a fear in China that the market will be closed at any second should something untoward happen.
The next issue is that to become an economic superpower you need a large and liquid debt or bond market. This does not exist in China at present. In order to become an economic superpower you need to have your currency widely distributed around the globe. Look at the dollar, it is everywhere and is often used as the local currency during times of crisis. It is stable and readily available and this is due in large part to the massive bond market and government debt market. Through this medium dollars can easily be exchanged in vast quantities around the globe. Second to the dollar is the Euro and then the Yen while due to the closed market economy that China prefers at present there is little in the way of Renminbi in global circulation. There really cannot be any significant circulation until the currency peg is released and the markets open up. I cannot see this happening any time soon as the Chinese government continues to control all aspects of the market with an iron fist and as far as I can see they will continue this trend for the foreseeable future.
Finally while there is no requirement to be a democracy there has never been a closed political body with an open economic environment that has lasted and become a global economic superpower. Russia tried it and failed and the cost to their economy was horrendous and I just cannot see it working in China. Something has to give. With the handover of power coming soon there is a chance that the new leadership will promote a more open political and economic environment, but the time that it will take to implement all of the requirements to become a global economic superpower I believe will confound even the might and desire of the Chinese for years to come. So while I agree that they are an economic force to be reckoned with, the step to becoming an economic superpower is a long way off.
No comments:
Post a Comment