Height vs. Weight: Will the Chinese Economy’s Mass Translate Into Global Stature? (Part 1)

Part 1 of a two-part blog on China’s economy. Part 2 can be found here.

China is ascendant in global affairs. Riding on the strength of its powerhouse economy, China is making a clear effort to bolster its international presence, economically and in many other areas. Yet now we are seeing Chinese economic growth slowing. Since economic power is the lever for China’s vault onto the global stage, the question then arises, how much will China’s growth slowdown impact its global agenda?

In recent years, emerging economies have risen to the highest levels of the global economy: the four major ones comprising the BRICs are all in the top 10 largest economies, and another four emerging economies finish off the top 20. And yet, the stature of these emerging economies in global affairs does not compare with their developed-country counterparts. This inequality is partially of their own making; in global forums such as the G-20, International Financial Institutions or the WTO, these economies typically tend to be reactive as opposed to proactive. China is trying to buck the trend, take the initiative and establish itself as an influential global power.

Part one of this blog, and Part two on Tuesday, examine whether China’s economic heft will translate into global stature. Today’s entry focuses on China’s future economic trajectory, while tomorrow’s will focus on the implications for China’s greater trajectory as a major player in global economic policymaking.

Historical Comparison

China’s current rise in economic growth is comparable to that of the United States about a hundred years ago.

By the start of World War I, the U.S. economy was almost as large as that of U.K., France and Germany combined. America’s 19 percent share of the global GDP rivaled the 22 percent of the other three countries. The U.S. economy’s growth rate at this time was also noteworthy: its share of the GDP had doubled over the previous 40 years, while that of the U.K. and France had stagnated.[1] But our global clout did not match our economic muscle, as evidenced by our minor role in the lead up to and resolution of World War I.

By the end of World War II about 35 years later, our global clout had finally caught up. We were clearly the dominant power in almost every area of world affairs. Particularly with regard to global economic policy, the U.S. effectively held the reins in the design of the Bretton Woods institutions: the International Monetary Fund, the World Bank and what would later become the World Trade Organization.

Our global influence was finally comparable to our economic standing. The devastation of Europe and Japan reduced the capabilities of other global leaders, as did the need of the rest of the world for our economic resources. But perhaps most importantly, it took a generation for the U.S. to become comfortable enough with its global influence to finally grasp and utilize it.

The Rise of China

China is currently the second largest economy on the global scale, and this begs the question: Will they follow a pattern akin to the U.S.’s economic trajectory 100 years ago? In order to answer this question, we must first examine China’s future economic growth.

China’s growth over the past 30 years is beyond unprecedented: it is phenomenal. To have sustained such high growth for such an extensive period of time constitutes an enormous statistical aberration. Noting this, two years ago, Larry Summers and Lant Pritchett of Harvard presented a provocative long-term forecast of China’s growth based on the statistical concept of reversion to the mean.[2]

Their thesis stated that, statistically speaking, for China to continue growing at its current rate of 7 percent is rather unlikely; it is much more plausible that the economy will fall to a 2 percent growth rate for most of the next 20 years. Of course, the problem with this prediction is that it would have been equally true 10 or even 20 years ago. And so, China is extraordinary specifically because it has so magnificently defied all odds in maintaining its growth rates.

But now, reality is finally bearing down on a country that has been experiencing unprecedented growth. Arguments can be made about the effects of reform progress, wage growth, the threat of a real estate bubble or the slowdown in global growth. These factors may matter, but they pale in comparison to a simple look at the scale of the Chinese economy relative to the rest of the world.

Thus far, China’s growth has been based on exports, and when a country comprises 2 percent of the global GDP, that is certainly possible. But it has been 20 years since China was only 2 percent of global GDP. Now, China’s economy accounts for 13 percent of the global GDP, and it is becoming harder and harder to grow faster than the global GDP as the country’s share of the market grows larger and larger. Export-driven growth is inherently self-limiting; China is effectively squeezing itself out of the market.

This situation can specifically be seen in relation to the U.S. economy. Ten years ago, the Chinese economy was 20 percent of the size of the U.S. economy. A year at 10 percent growth meant adding 2 percent of the U.S. economy to the planet, and the global economy can accommodate expansion like that. But now, China’s GDP is more than half as big as the U.S. Even continuing its current 7 percent growth rate for 20 more years means the country would expand by an amount equivalent to 150 percent of the U.S. economy. It is inconceivable that the planet could accommodate such a huge addition to the global economy so rapidly, as markets would certainly overheat.

This reality helps explain why, for the past few years, Chinese leaders have consistently emphasized a rebalancing of their country’s economy. Domestic growth is the only way to expand once a country is as large as China is right now. U.S. growth, for example, has always come mostly from selling to domestic consumers; we created our own customers. As of now, this process of rebalancing growth toward domestic markets has not yet happened in China.

In the absence of successful rebalancing, the Summers and Pritchett forecast does not seem far-fetched, despite being far from the consensus view. It is reasonable to expect that China’s economy will grow at 3 percent — still managing to double in size over the next 20 years — but still remain smaller than the U.S. economy.

[1] Ironically, the United States’ GDP share came at the cost of China’s, whose share dropped by half over the same period.

[2] Lant Pritchett and Lawrence H. Summers, Asiaphoria Meets Regression to the Mean, working paper (National Bureau of Economic Research, October 2014), www.nber.org/papers/w20573.

Russell Green is the Will Clayton Fellow in International Economics at the Baker Institute and a former U.S. Treasury attaché in India. This blog complements his analysis at an April 6, 2015, Baker Institute event on “Political Reform in China.” 

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