Sun, May 27, 2012 - Page 8 News List

Middle Kingdom, middle ground

By Robert Skidelsky

Is China poised to become the world’s next superpower? This question is increasingly asked as China’s economic growth surges ahead at more than 8 percent annually, while the developed world remains mired in recession or near-recession. China is already the world’s second-largest economy and will be the largest by 2017, and its military spending is racing ahead of its GDP growth.

The question “Will China’s rise automatically be at the expense of the US?” is reasonable enough if we don’t give it a US twist. To the American mind, there can be only one superpower. Indeed, for many in the US, China represents an existential challenge.

This is way over the top. In fact, the existence of a single superpower is highly abnormal and was brought about only by the unexpected collapse of the Soviet Union in 1991. The normal situation is one of coexistence, sometimes peaceful sometimes warlike, between several great powers.

For example, Great Britain, whose place the US is often said to have taken, was never really a “superpower” in the US sense. Despite its far-flung empire and naval supremacy, 19th-century Britain could never have won a war against France, Germany or Russia without allies. Britain was, rather, a world power — one of many historical empires distinguished from lesser powers by the geographic scope of their influence and interests.

The sensible question, then, is not whether China will replace the US, but whether it will start to acquire some of the attributes of a world power, particularly a sense of responsibility for global order.

Even posed in this more modest way, the question does not suggest a clear answer. The first problem is China’s economy, so dynamic on the surface, but so rickety underneath.

The analyst Chi Lo lucidly presents a picture of macro success alongside micro failure. The huge stimulus of 4 trillion yuan (US$586 billion) injected into the Chinese economy in November 2008 was largely poured into loss-making state-owned enterprises via directed bank lending. This helped to sustain China’s growth in the face of global recession, but the ultimate price has been an increasingly serious misallocation of capital, resulting in growing portfolios of bad loans while excessive Chinese household savings have helped to inflate real-estate bubbles. Moreover, Chi argues, the global economic crisis of 2008 shattered China’s export-led growth model, owing to prolonged impairment of demand in advanced economies.

China now urgently needs to rebalance its economy by shifting from public investment and exports toward public and private consumption. In the short run, some of its savings need to be invested in real assets abroad and not just parked in US Treasuries. In the longer term, however, Chinese households’ excessive propensity to save must be reduced by developing a social safety net alongside consumer credit instruments.

Moreover, to be a world economic power, China requires a currency in which foreigners want to invest. That means introducing full convertibility and creating a deep and liquid financial system, a stock market for raising capital and a market rate of interest for loans. While Beijing may have talked of “internationalizing” the yuan, it has done little so far. “Meanwhile,” writes Chi, “the dollar is still supported by strong US political relations with most of the world’s largest foreign-reserve-holding countries.” It is also interesting to note that Japan, South Korea, Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates continue to shelter under a US military umbrella.

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