The Hurdles That Hurt China

INTRODUCTION:


In the last decade China has shown its military prowess to the world and its manufacturing sector watched a strange story of sustained growth. In spite of these, China faces lots of trouble in coming days which may act as hindrances in the road of being a true superpower, a country having economic as well as military might. China's main problems are three folded, economic, political and geo-political.


ECONOMIC HURDLES :


One thing we've realized over recent years is that nothing goes up in a straight line forever. China looks like it is about to inherit the world, but Japan looked like that for a while. Japan was the second largest economy in the world. We were told that one day the world would be run by Japan. It didn’t turn out that way.

Most Asian Tigers have grown at about 9% a year for 20-25 years and then shifted downward to 6% or 5% growth. I’m not predicting any kind of Chinese crash. I am simply saying that China will follow that law of large numbers and regress at some point to a slower growth rate - perhaps a little bit later than the others because it is a much larger country.

But it is also worth pointing out that there are massive inefficiencies built into the Chinese economic system. They have a huge property bubble. Their growth is highly inefficient. In terms of foreign direct investment, China attracts every month what India takes in every year. Still China only grows two percentage points faster than India.

In other words, if you think about the quality of Chinese growth, it’s not as impressive as it appears. They are undertaking massive investments - huge numbers of airports, eight-lane highways and high-speed rail. But if you look at what you are getting in terms of the return on investment it is not as impressive.

China has another huge problem. The UN just came out with a report that pointed out that China is going to have a demographic collapse over the next 25 years. It is going to lose 400 million people.

There is no point in human history in which you have had a dominant power in the world that is also declining demographically. It simply doesn’t happen. And if you want to look at what a country in demographic decline looks like, look at Japan.



POLITICAL WEAKNESS :


Let’s say that China does become the largest economy in the world: Does it have the political capacity to exercise the kind of leadership you need?

Remember, Japan was the second largest economy in the world for decades and I didn’t see any kind of grand, hegemonic design. You need to have the political capacity to be able to exercise that kind of leadership.

China is a country ruled by a political system that is in crisis.

It is unclear whether the next succession that China goes through will look anything like this current one. China has not solved the basic problem of what it is going to do when it creates a middle class and how it will respond to the aspirations of those people.

When Taiwan went through a similar process, what you saw was a transition to democracy; when South Korea went through it, you saw a transition to democracy. These were not easy periods. They were fairly bloody and chaotic.




GEO-POLITICAL PROBLEMS :


People like to talk about the rise of Asia. But there is no such thing as Asia. There’s China; there’s Japan; there’s India. And they don’t much like each other.

You are going to find that as China rises there is going to be a spirited response in India, Japan, Indonesia, Vietnam, South Korea and others. You already have begun to see the stirrings of this. China is not rising in a vacuum. It is rising on a continent in which there are many, many competitors.