Photo: star5112 / Flickr
It’s a story that needs no repeating – the definitive economic, financial, and political issue of our time. The United States is fading into obscurity. Despite the fact that the country’s GDP totals only ½ of America’s, China’s taking over the world.In short, “every week a new book title announces an “irresistible” tilt east, the emergence of “Chimerica” and a not-too-distant future when China “rules” the planet.” China’s winning. America’s a distant second.
Now, here’s the thing: it’s time to hold up on the “America’s declining/China’s taking over the world” rant. After all, remember Japan? The country Americans once observed with panicked fascination now sits on the world’s periphery, suffering from a deflationary hangover while struggling with how to deal with a nearly unsolvable demographics issue several decades in the making.
So, in short, while China is certainly a political, economic, and financial force to be reckoned with, the United States isn’t quite ready to secure its place on the silver podium.
Here, then, are the 5 key issues ailing China:
1) Rotten to the core: Often lost in the China-as-Superpower debate is a thorough examination of the corruption that rots both the political and economic systems of the rising nation. To whit: in the past five years alone, more than 660,000 government officials have been investigated for corruption of some sort, highlighting “many serious cases which involved phenomenal sums of money and officials at or above the ministerial level.” Furthermore, for a foreign enterprise to do business within the country, one in which “bribery is rampant,” means running the significant and expensive risk of intellectual property theft. In short, it’s more expensive to do business in China than most think – a factor that will inevitably cut into the country’s ascension in the 21st century.
2) China’s non-growth story: One word defines China’s 21st century growth: infrastructure. Now, obviously, China’s exponential economic growth has come from more than just internal spending (sales to developing regions such as Latin America and Africa (as well as Asia) – while trailing behind those of the United States – have obviously driven China’s development), but Chinese officials have expertly utilized (if not over-depended upon) internal infrastructure projects to maintain the country’s economic momentum. In fact, “fixed asset investment – a key indicator on infrastructure spending – was up 20.6% in 2012. A staggering £3.63trn was spent on infrastructure projects through 2012,” as “China accelerated administrative approvals for infrastructure investment, notably for building subways, in the middle of last year, in a bid to boost economic growth.” In short, “infrastructure spending will continue to be a key factor in China’s economic performance this year,” compiling nearly 70% of the country’s GDP (a number nearly twice as high as 1980’s Japan (35%) and the United States (20%)). Take away this internal spending, and China’s growth numbers slow dramatically. Which leads us to…
3) The lending nightmare that is China: This infrastructure spending binge has and will continue to come at a heavy price for China: “Financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt,” these infrastructure projects mean “China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come.” In fact, after China’s national government instituted a $586 billion stimulus program in 2008 to stem the effects of the global financial crisis, China’s cities gorged on infrastructure projects to boost productivity and growth. Now, nearly 5 years later, while the total debt load numbers remain opaque, experts predict them to total between 25-250% of per cent of the country’s GDP, which signifies that “loads of bad debt could also result in inflation, a prolonged economic slump, or even a financial meltdown.” Furthermore, as China’s banking system has evolved, essentially, into an unmitigated disaster, there have emerged significant concerns about the country’s financial system, including those involving “wealth management products offered by “trust companies,” part of the shadow banking system that operates outside the official banking sector but is entwined with it.”
4) Demographics: It’s no secret to the informed that China has a massive demographics issue that will, one day soon, cut significantly into the country’s economic horizons. The nation’s single-child policy has created a self-fulfilling low fertility loop, with “children of one-child families wanting only one child themselves,” meaning “China now probably faces a long period of ultra-low fertility.” This reality has created a demographic duality: while “America’s population is set to rise by 30% in the next 40 years,” China will hit its population peak in 2026, decreasing sharply after that.
Most importantly, China is ageing at an unprecedented pace in modern history: by 2050, experts predict the average age in China will hit 49, nearly a decade older than in the United States. This means that, because the country is growing older at a quicker pace than it is wealthier, “China will have a bulge of pensioners before it has developed the means of looking after them.” Currently, China’s unfunded pension liability totals roughly 150% of the country’s GDP, with local governments already reneging on pension obligations.
Finally, between 2013 and 2050, China’s workforce is set to shrink as share of the “population by 11 percentage points, from 72% to 61%—a huge contraction, even allowing for the fact that the workforce share is exceptionally large now,” meaning the end of China as the world’s source for cheap labour. Most interestingly, experts predict that within the next 20 years, China will begin “importing workers from outside, rather than exporting them,” slowing growth in an already stressed economy.
5) America knows how to fail better than the Chinese: To the uninitiated, this point may not make sense, but think about it: despite 2008’s rescue attempt of the American financial system (aka, the TARP debacle), the United States has, historically, been capable of absorbing the economic and financial pains of industry collapse while adapting and moving forward. Think of the steel industry: having reached its apogee between 1940-1970, the steel industry quickly (and, it must be stated, painfully) declined, contracting down to the point that by 2001, it accounted for less than .1% of manufacturing employment and output. As a state-controlled economy, China possesses no such will or mandate to allow this sort of economic and financial evolution without running the risk of revolution from an expectant (and unstable) population. This leaves an ugly core of corruption and control pushing to sustain increasingly low-margin industries in a country growing beyond its Communist means.
So there we go. Is China poised to continue to be a world power? Yes. Of course. But the next United States? Not so fast. After all, no one manufactures, evolves, and, of course, fails as quickly and effectively as we do.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]
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