A Giant's Growing Pains
Here's a piquant illustration of how China is emerging as a global economic and military superpower. The College Board asked a group of American high schools across the country to consider adding Advanced Placement courses in Russian, Japanese, Italian, and Chinese. Ten times the number of schools opted for Chinese over the other three languages.
The perception of China's rise is sound. In the past two decades, its economy has been growing at 9 percent a year, propelled in part by low-end, labor-intensive manufacturing sustained by an explosive consumer market. China is now also a force in commodity markets, especially energy. The achievement is not one of communism. It can be traced to China's determined shedding of the corset of a planned, top-down socialism in favor of a more market-driven economy that has released the energy and talent of hardworking people. Today, the technical and managerial skills of the Chinese are becoming as relevant as their cheap labor. Indeed, China is graduating so many engineers and scientists that they will accelerate its economic growth by throwing more brains at technical problems at a fraction of the cost in the West.
The Chinese economy is also distinguished by an appetite for investment. If you include foreign direct investments of $10 billion to $15 billion a month, the rate approaches 50 percent of gross domestic product--the highest ever achieved in a large economy and dramatically higher than the 30 percent peaks in Japan and South Korea. Again, more freedom is the trigger. Since it became a member of the World Trade Organization in 2001, China has lowered tariff barriers from 41 percent to below 6 percent today. It has the lowest tariffs of any large developed country.
Growing old. The catalog of China's economic impact is longer than its fabled Great Wall. From the perspective of workers in America, Japan, and Europe, a downside to the Chinese economic expansions has been a reduction in the pace of growth in their real wages. At the same time, cheaper Chinese goods have saved American consumers hundreds of billions of dollars while lower inflation has allowed central banks to hold interest rates lower for longer. Along with the Chinese purchases of American government bonds, this has kept long-term rates in America well below their averages at the equivalent stages of previous economic recoveries since 1960. The housing boom here is one beneficiary. So our inflation rates, interest rates, housing markets, wages, profits, and commodity prices are all a function of the Chinese economy.
But how long can they keep it up?
The short to midterm looks positive. Some 25 million Chinese enter the workforce annually. Given the age of its current population, its savings rate of 40 percent, an economy open to investment, a dramatic commitment to mass education and to improving the lives of its own people, and the ability to transfer huge numbers of workers from low-productivity agriculture to higher-productivity manufacturing, China should be able to continue growing at a rate of 7 to 8 percent for the foreseeable future. Let's pause to contemplate what that means: By the middle of the century, the poor country we saw 50 years ago as just so many rice paddies and rickshaws may well be the largest economy in the world. It is an awe-inspiring shift in global power comparable to the rise of Europe in the 17th century and that of America in the 19th and early 20th centuries.
advertisement
