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China's global economic and geopolitical destiny

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In Brief

China's economy grew at its slowest pace in three years, with growth at an annual rate of 8.1 per cent in the first quarter of 2012, hit by slowing exports and a weak property market.

There are those that see the deceleration of GDP growth over the past year as a significant turning point in Chinese economic fortunes.

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Arch bear Michael Pettis, a professor at the management school at Peking University, reckons it won’t be long before China will struggle to achieve a growth rate of 3.5 per cent, back in the pack with the stronger growing advanced industrial economies. While Pettis does not expect to see ‘a serious contraction in growth until after 2013’, he says that ‘China would be the last major economy to emerge from the global financial crisis. Why? Because the huge increase in investment it engineered to postpone the domestic impact of the global crisis exacerbated the imbalances within the economy and increased its already-excessive reliance on debt and investment to generate growth’.

Yet so far China has glided through the global financial crisis largely unscathed, as Barry Eichengreen points out in this week’s lead. ‘Even if China’s economic growth now slows to 7.5 per cent, as anticipated in the government’s latest official growth forecast’, he points out, ‘this figure will still be triple the rate of growth in the US, where post-crisis economic expansion remains subdued. It will not be long before China overtakes the US in sheer economic size. And with this reversal of economic fortune will also come a reversal of political fortune, as China assumes the leading role on the global geopolitical stage. The 21st century, in this view, will be China’s century’.

Citigroup Research and Analysis sees China’s GDP measured in US dollar purchasing power parity terms (at US$21.98 trillion) topping America’s (at US$19.1 trillion) by 2020.

A number of factors, as Eichengreen notes, may throw this forecast off course. China could hit the wall, as Pettis suggests. The new model of growth with rising domestic consumption that’s needed to compensate for slowing export growth may kick in more slowly than sustaining a 7.5 per cent medium-term growth rate requires. America could enjoy an economic renaissance, through a comeback of manufacturing. China is unlikely to be able to emulate US start-up culture and innovative ingenuity for many years. The impressive 4.4 per cent GDP growth in the fourth quarter of 2011 and steady employment growth that has accompanied recovery from the global recession are harbingers of a stronger American economic future.

‘So is the era of Chinese ascendency and US decline now over?’ asks Eichengreen.

‘Not so fast’, he answers. China’s growth may be slowing but the high target rate of growth is achievable, with plenty of room for policy-making flexibility and continuing signs of strong expansion beyond the coastal industrial centres and industrial upgrading proceeding rapidly in China’s industrial heartland. And while US recovery now appears secure, no one thinks that last quarter’s growth rate, boosted by strong re-stocking as it was, is likely to continue. For the US, the more serious problem is confronting the political gridlock that prevents it from dealing with its structural fiscal problem, a problem that the passing of the election in November won’t automatically resolve.

That Chinese policy makers have to acknowledge and address the major challenges that face their economy, and US officials have had positive achievements over the last three years, Eichengreen correctly concludes, does not change the fact that China will continue to close the relative GDP gap.

What’s happening to China’s economy and its position relative to that of America, of course, has important internal political, as well as geopolitical, implications. An economy that has been growing at around 10 per cent a year — and doubling in size every seven years — throws up huge new political problems and challenges, month by month, year by year. China, as we were reminded again last week with the upheaval around the sacking of former Chongqing party chief, Bo Xilai, from the politburo, is not devoid of debate, argument and fierce political contestation. That this has been happening for over three decades means that China is now a profoundly different country from what it was even a decade, let alone three decades ago.

The conflict surrounding the Bo Xilai affair provides remarkable insight (in real time, not a long time after the event) into the struggles and debates that have been taking place among the party leadership and across the country about the economic and political directions China should take and how its new leadership should be constructed. How these events play into the leadership changes in November is not yet clear but the global consequences of the Chinese Communist Party Congress this northern autumn will certainly vie in importance with those of America’s presidential election that takes place around the same time.

Peter Drysdale is Editor of the East Asia Forum.

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