The Beneficent Dragon

The dangers associated with China’s ascendance are exaggerated.

Many pundits characterize the Chinese economy, now the world’s fourth largest, as a juggernaut that threatens America’s economic leadership. After all, China’s GDP growth in recent years has been three to four times our own, and its share of global exports has skyrocketed. At the same time, America’s bilateral trade deficit averaged a staggering $18.9 billion per month in the first quarter of 2007. Sectors including textiles, footwear and computers have seen significant job losses to competitors based in China. What’s more, the formerly cash-poor Chinese economy has now accumulated the largest foreign exchange reserves in the world, approximately $1,202 billion, over half of which is in U.S. Treasury bills. These figures are certainly striking, but a closer examination suggests that China’s ascendancy need not lead ineluctably to America’s decline.

China’s emergence on the world economic scene reflects the law of large numbers. When China abandoned its autarkic, centrally planned economic model, it unleashed what economists call a “positive supply-side shock.” Simply stated, a huge number of people and a huge pool of resources entered the world economy. China’s work force of 798 million people became part of the global trading system essentially overnight. Major changes to trade balances were inevitable but not unprecedented. China’s growth rate, while impressive, is almost identical to that achieved by Japan in the 1950s and 1960s when that country effectively reentered the world economy after the devastation of World War II.

Nor is the absolute size of China’s economy extraordinary. In 2006, China’s GDP reached $2.6 trillion — an impressive number until compared to the United States’ $13.2 trillion. The average American generates nearly $44,000 toward the GDP annually, while an average Chinese generates less than $2,000. Even under the most optimistic assumptions, there will still be a gap in GDP of three to four times in 2050. Moreover, China’s export performance looks less intimidating when one remembers that between 40% and 60% of its exports are manufactured by foreign companies located in China.

There are other numbers to keep in mind as well. Only 12% of the Chinese population has the equivalent of a high school degree, compared to 80% in America. Half of all China’s industry remains under the control of 140,000 notoriously inefficient state-owned enterprises, and its banking sector remains awash in nonperforming loans.

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