I have just finished watching Robert Peston's excellent programme on China, entitled How China Fooled The World. It explains that China is unlikely to carry on growing at the breakneck pace it has over the last few decades The problems are so numerous that it seems highly likely that they will combine in some way soon to ensure that the Chinese economy suffers at least an extremely bumpy landing. They include: huge and growing debt levels; massive, unsustainable levels of investment, much of which has gone into vanity projects; inefficient state enterprises; low levels of consumer spending caused by the high savings rates due to the lack of a western style welfare state; a residential property boom fuelled by debt and the view that an apartment is an asset rather than a home to live in; and, of course, wide spread corruption. One problem that the programme didn't cover is China's rapidly ageing population, exacerbated by the regime's one child policy, which means that the ratio of economically active to inactive citizens is low and declining year on year.
Peston's programme reveals nothing new. Reports of China's problems have been in the financial and economic press for many years. A more detailed account of the prospect of China's economy running out of gas is contained in a recent book, entitled The Great Rebalancing by Michael Pettis, an economist at the University of Peking. In short, it would seem that many people who look at this matter closely feel that China is where the US and Europe were in 2005/6. This analysis suggests that all those charts that extrapolate China's double digit growth into the future and showing it eventually overtaking the US to become the world's biggest economy are unlikely to be proved correct.
If these warnings prove justified, China will be the last in a list of three countries who were once wrongly tipped for world economic dominance since the end of WWII. When I worked in the City in the late 1980,s the talk was all about the rise of Japan. Japanese industry had come to dominate world export markets for manufactured goods by employing revolutionary new production methods and, on the back of this, Japanese banks were becoming the biggest in the world, setting up offices in all the big financial centres and paying record amounts for French Impressionist Art and Van Goghs. You would see Japanese bankers in London every day. It was believed that Japanese banks paid the best and they were the first to introduce the practice of paying bonuses of up to 10% of anything you made above budget, in order to attract the best talent. The Japanese economy seemed unstoppable. It had high growth, high pay, no unemployment and electronic consumer products that everyone wanted and with which others couldn't compete. It became the most expensive place to live. Traders told me that they had to take the bus from the airport to their hotel when they flew to Tokyo because a taxi was too expensive (this was the London branch of a triple A rated Swiss bank). Wild comparisons were made between Japanese and US real estate prices: The Imperial Palace in Kyoto was worth as much as the whole of New York; Tokyo was worth as much as the whole of California. How odd it now seems, in the light of her two lost decades, that it was once seen as inevitable that Japan would supplant the US as the world's largest and most powerful economy.
Yet this is as nothing to the humiliating embarrassment that must be felt by those who seriously propounded the case of the third country on my list. I remember listening to an interview with two leading economists recently who were expressing scepticism about China's ability to overtake the US. During the discussion, one of the contributors pointed out that in the middle of the last century, graphs showing the USSR overtaking the US some time before the new millennium were common. Although this now seems farcical, it was a perfectly correct extrapolation in the 1960s. It is easy to forget that the USSR had been transformed by the Communists from a predominantly feudal economy under the Tsar, to an industrialised superpower that crushed the Wehrmacht and put the first man in space, all in around 4 short decades.
So, first the USSR failed to match up to its early promise, then Japan and now China by the look of things. However, although China's economic future is unclear, there is one thing we can say with certainty. America's place as the world's no. 1 economy is assured. Pax Americana is going to be with us for some time yet.
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