China’s present position and future prospects:
According to the IMF, China has a $13.5 trillion nominal and $25.3 trillion purchasing power parity adjusted GDP as of 2018. It is the second-largest and largest economy in the world by those respective measures. Remarkably, given its vast populous, China’s nominal per-capita GDPs is $9,600, while its PPP-adjusted per-capita GDP is $18,100; the 71st and 78th largest in the world by those respective measures. This clearly shows that the low-hanging fruit of China’s development are far from exhausted and, despite economic headwinds, China can expect a prolonged period of very rapid growth.
This comfortably places China as the largest national economy in Eurasia (by any conception of the term, since any sane conception excludes the United States). Despite its preponderant scale, China’s economy maintains distinctive characteristics of a developing economy: a large, low value-added manufacturing sector principally geared toward exporting low-cost goods, weak enforcement of intellectual property laws and an indigenous IP portfolio of dubious quality, a weak domestic welfare system, and a closed financial system with robust capital controls, among many others.
China balances these shortcomings with a strong, centralized, and hyper-competent government capable of pursuing long-term industrialization plans, world-class infrastructure, high rates of government and private investment, high rates of research and development spending, and high national savings and foreign reserves.
At present, China’s interaction with the other nations of Eurasia (and its periphery more generally) is almost entirely commercial. To take one example of this commercial hyper-focus, China has a mutual defense treaty with only one country: the Democratic People’s Republic of Korea (North Korea); contrast this with the multiplicity of defense treaties of different types the United States has around the world. Although the United States is a historical anomaly in this regard, China’s dearth of allies is also historically peculiar and is not at all commensurate with a country of its present - let alone future - stature. Whether this is the correct strategic approach for China to take is something I will presently defer examining.
The principal take-away here is that China is a country that straddles two worlds: the hyper-modern, cosmopolitan future typified by the glittering skyscrapers of its first-tier cities, and the backward, rural past typified by the poorest regions of its interior. For the immediate future, China’s highest national priority is to lift the foot mired in the past and plant it firmly in modernity. All of China’s foreign relations, including its relations with Eurasian states, must be understood through this overarching imperative.
To attain the admittedly arbitrary development goal of a PPP adjusted per-capita GDP of between half and two-thirds that of the United States by 2050, assuming that the US per-capita growth rate of 1.0% and a Chinese population growth rate of 0.5%, China must grow at an average rate of between 3.25% and 4.25% per annum over 30 years. For comparison, China grew at an average annual rate of 6.9% over the past 5 years. Given how far China currently is from the technological frontier, such rates of growth over a prolonged period appear eminently achievable barring a catastrophic implosion of the Chinese state.
If such growth is beyond China’s reach, that unhappy result must be the consequence of greatly diminished global growth. Needless to say, such massive economic turmoil will not leave the US unscathed – the US might even be the source of such contagion, as it was in the Great Recession of 2008 when its economy contracted as a result of the implosion of a severely over-leveraged housing bubble. For better or worse, globalization has tied together nations’ economic fates.
As China develops and its per-capita GDP rises, pressures to reform its financial system gain impetus. As I noted previously, China maintains strict capital controls – indeed, it has recently introduced legislation that punishes operators of “underground banks” with jail time if they flout these controls. While this is absolutely necessary to protect China from the ravaging effects of international speculative capital (so-called “hot money”) and capital flight, one cannot escape the conclusion that such a choice effectively strangles any near-term prospects of significantly internationalizing the yuan.
This is no mean issue. The overwhelming bulk of trade China conducts internationally is done in the national currency of what is most generously described as a geopolitical rival. Some modest efforts to internationalize the yuan, most notably the recent launching of an oil futures bourse in Shanghai, are promising; but they still confront the towering wall of capital controls.
A notable “concession” China has offered in recent trade negotiations with the United States is the opening of its financial system to foreign competition. Whatever the short-term disruption this might have (and it is quite predictable that these foreign companies will take significant market share), the long-term benefits of sharpening and honing domestic financial firms through exposure to tough competition is wholly beneficial, and marks an important step in the maturation of the Chinese financial system. Of course, any such deal must be reciprocal, with Chinese firms having the freedom to operate in Western markets.
[Section on Chinese military modernization. To be continued...]