Chinaâ€™s Political-Economic Future:
Is Chinaâ€™s Emerging Economy a threat to U.S. PrimacyKeith P. Marino
Chinaâ€™s impressive economic growth as a result of currency devaluation, artificial labor costs, and massive exports of cheap goods has created an unfair playing field for global markets and at the same time made the global markets largely dependent on Chinaâ€™s sustainability. As Chinaâ€™s economy continues to prosper, their demand for finite resources will cause severe reaction to global price increases in commodities such as oil, steel, and food. But, can China sustain its growth? Or will its rising food costs, restrictive population controls and a massive inflation eventually slow this economic powerhouse? I try to address these questions and several others in this paper.
US-China Political-Economic Future:
Is Chinaâ€™s Emerging Economy a threat to US Eurasian Strategy
Following the economic reforms instituted in China in 1978, the world has witnessed an incredible economic engine turning relentlessly in the East. With the introduction of China into the World Trade Organization (WTO) in 2001, global markets had access to the worldâ€™s most populous nation; a prospect that promised significant economic boosts not only to Chinaâ€™s economy but to other economies benefitting from Chinaâ€™s cheap exports. Aside from these tremendous steps toward globalization and free market principles, Chinaâ€™s economic future is fraught with challenges that could help to ensure the balance of influence in Eurasia remains largely in Americaâ€™s favor, and ensuring Americaâ€™s global primacy.
China is massive. With a population of 1.3 billion and an area of 9,596,960 square miles (Factbook) it boasts the largest population and the 4th largest land mass on the planet. Its economic growth has been unprecedented and by many accounts, largely unsustainable. Several sectors of Chinaâ€™s economy, including massive inflation, artificial labor rates, devalued currency, substantial poverty and income disparity, declining workforce, negative birthrates, an aging population, and an increased democratic awareness among its people, cast dark shadows on its potential for a promising future and are bleeding into its foreign policy initiatives. Indeed, the challenges China must overcome to ensure its political economic model survives are somewhat mind boggling.
Chinaâ€™s near-term foreign policy will be regulated largely on its domestic economic policies. The paramount economic concern for China is inflation as cautioned by World Bank President, Robert Zoellick and echoed by Chinese Premier, Wen Jiabao (Kurtenbach, 2011). Posting consumer price increases of 6.5% for 2009 and 6.2% for 2010, China is scrambling to trim back the flow of money. As is the case with inflation, it is causing substantial increases in everything from food to fuel. With a significant proportion of per capita income going to the purchase of food, consumer purchasing power of other goods has steadily decreased, causing China to become ever-more reliant on its export market to sustain its GDP. John Stepak, Money Week Editor, nicely summarized the dilemma China faces stating:
The danger facing the country is clear. If it tightens too late, inflation takes off, and social unrest explodes, setting the stage for a hard landing. If it tightens too hard and fast, economic growth collapses, bad debts surgeâ€¦(Stepak, 2011).
As will be asked several times throughout this paper, the question of â€œHow does this affect America?â€ will be addressed. Regardless of the direction China takes with its monetary policy, America may find itself back in a position of greater economic leverage in Southeast and Central Asia. The doomsday scenario involving Chinaâ€™s inflation may result in future investments shifting away from China and placed in India. Although not directly influencing American markets, a shift by foreign investors from China to India would have significant geostrategic implications on the balance of power in Central Asia, a key aspect to US Eurasian geostrategic initiatives.
Domestically, Chinaâ€™s inflation problem will have substantial effects on the Chinese populationâ€™s perception of its government. As the cost of living continues to climb, the potential for massive public unrest exists and could severely hamper the growth of the Chinese economy, especially if wages are not increased to keep pace with the inflation rates. Whatâ€™s more, the Chinese economy is so dependent on the condition of the global market, current economic conditions like the one weâ€™ve been experiencing the past couple of years have had a substantial impact on Chinaâ€™s growth. With most Chinese citizens unable to afford the products China exports, the portion of GDP as part of domestic purchases remains extremely low considering the massive population, and impacts Chinaâ€™s ability to hedge itself against external market conditions.
Several other economic concerns currently plague Chinaâ€™s future growth potential. The reforms of 1978 implemented very restrictive family planning law that has limited Chinese families to one child. In an attempt to control an exploding population, the â€œOne childâ€ policy is now beginning to show its effects thirty years later. Meant to last only one generation, Three generations have passed under a policy that has mandated a national negative birth rate which has resulted in a shrinking labor pool and an ever-increasing aging population. Many of the nationâ€™s working class have migrated to city life and careers, allowing Chinaâ€™s rural population to command higher wages, subsequently causing further increases in the cost of food (Stepak, 2011).
The results of Chinaâ€™s population control arenâ€™t limited solely to the number of people available to continue the nationâ€™s robust growth. It is also having a substantial effect on the tax base. The average Chinese female fertility rate of 1.75, (Chang, 2008) although it could be as low as 1.4 for the decade between 2000 and 2010, falls well short of the 2.1 needed to sustain or stabilize the population. Unfortunately, these restrictive family policies have impacted Chinese females more than their male counterparts. According to a scholarly journal by Mina Chang, the need of rural families to have male children is viewed as critical to the sustainment of the familyâ€™s existence and patriarchal dominance. Male children are seen as future providers for their elderly parents and grandparents. As a result, orphanages are inundated with little girls and female infanticide is a stark reality. The resulting gender balance could mean big problems for the continued ascendancy of China on the global stage.
Getting past the population problem will be challenging but the hurdles do not end there. As a participant in the WTO, China agreed to adhere to certain international rules consistent with free-trade principles. According to Thea Lee of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), Chinaâ€™s government is not playing by the rules of the WTO, causing significant trade imbalances (Brown, 2011). She goes on to say Chinaâ€™s artificially evaluation of its currency, egregious violations to labor rights, and an unwillingness to allow the same unfettered access to its markets that it enjoys of so many other nations is partly to blame for high unemployment in the US and around the world. Myron Brilliant, Deputy Chief of Staff of the Chamber of Commerce, disagrees somewhat here by stating â€œChina is good for Americaâ€ but concedes China needs to abide by the rules it agreed to when it joined the WTO.
These sorts of statements are not unique to the US and the longer China ignores the international community, the more it stands to ostracize itself. British Prime Minister David Cameron echoes the sentiments of many around the globe. He believes a â€œdangerous tidal wave of cashâ€ from one side of the globe to the other riskes pushing economic growth back into reverse (Chapman, 2010). In todayâ€™s economic climate, it is easy to assume diplomatic relations would also sour and potentially isolate China from foreign markets, especially western markets. China must either raise interest rates to stem the tide of borrowing or it must allow inflation to take hold, forcing it to raise the prices of its exports which will necessarily raise the value of the Renminbi. In either case, China should start to expect reductions in its historic growth over the next decade. In an International Monetary Fund Working Paper, Kai Guo and Papa Nâ€™Diaye discuss in great detail and draw the conclusion that in order for China to maintain its impressive growth, China will need to focus more attention on the percentage of GDP from domestic consumer spending (Guo, Nâ€™Diaye, 2009).
So how does the US mitigate the growth of China and if it canâ€™t mitigate its growth, what options does the US have to ensure regional security? The answer involves food and energy. Already a major head-hurter for the Chinese government, China is importing a massive amount of wheat in order to feed its people due to overgrazing, over-logging and the substantial loss of ground water (Pocha, 2006). According to The International Institute for Applied Systems Analysis (IIASA) China has sufficient arable land to cultivate its need of approximately 500 million cubic tons of wheat per year, but it makes clear there is no guarantee China will do so (Heilig, 2004). In the six years following Heiligâ€™s article, China was importing millions of tons of soybeans wheat and corn, not only to feed its people but also to feed large-scale hog farms to meet the countryâ€™s increasing demand for meat (Wui Yap, 2011). As shortages of food become more prevalent, food costs necessarily go up and could eventually mean the beginning of an even larger problem of social revolution.
Liu Rui, Economics Professor at the Peopleâ€™s University of China, in an interview with the Associated Press (AP), discussed the disparity between the rich and the poor as indicated by the difference between civilian dinner tables and posited the very real danger of social unrest if the food crisis is not averted (Sloan, AP, 2011). According to Karen Sloan of the AP, Chinese leadership is well aware of the dangers inherent of food shortages and has acknowledged the crisis in Egypt in May, 2011 being caused, in part, to the high cost of food. Massive income gaps seem to be par-for-the-course in the communist model and so are, to the detriment of its leaders, revolutions. If China does not get a handle on food prices, which is most likely a result of its inflation, there is little, if any, reason for the U.S. to fret over an emerging China. China will fall victim to a self-induced diet.
America is not immune to hikes in food prices. It is expected overall food prices will raise between 2% and 3% in 2011(Andrejczak, 2010) [UPDATE: Actual Food at home Index rose 6.2% according to Bloomberg. (Scheuble, 2011)] which will further dampen Americaâ€™s economic recovery. But even in these economic times, the average American still has vastly more wealth then the average Chinese, making America much more capable of weathering food inflation. As one of the worldâ€™s largest exports of corn, wheat, soybeans and other commodities, Chinaâ€™s holding of $1 trillion dollars in treasury bonds (debt) as leverage begins to lose some of its sting. How would China react to massive starvation of its people? Would it forgive the US of some of this debt or would it allow its people to starve just to spite the US? Would the US continue to export to China if China is unable to pay its grocery bill? or would China begin chipping away at the debt it holds in exchange for food exports at a reduced rate? The point is, all the talk about China demanding repayment due to a loss of faith in the dollar is premature when considering the ramifications that decision may have on commodities exports from the U.S.
After food, China needs far more energy to meet the demands of millions of new drivers each year and its massive industrial sector. As the number of vehicles in China increases and the assumption Chinaâ€™s industry will continue to grow, Chinaâ€™s demand on world commodities like steel and oil will rise. Already a major player in the New Great Game, China has a vested interest in the Caspian Sea and its oil. However, as games often go, there are competitors seeking to siphon off as much of the energy from the area as possible and these competitors are major players of a global scale. Russia, India, Turkey, The EU, Iran, and last but not least, the U.S. all have valid, very different reason for their interest in the Caspian, but a common thread through all players is the desire to tap into the Caspianâ€™s $5 trillion potential (Lavelle, 2007).
Chinaâ€™s looming economic problems present some serious road blocks to its sustainable development over the next 10 to 20 years and considering the magnitude of the issues listed throughout this paper, it becomes poignantly clear the direction China is headed when we considered the items not necessarily mentioned in this paper. Based on the assessments made concerning Chinaâ€™s inflation problem, population demographics, and food shortages, there is good reason to believe Chinaâ€™s ascension as the next global super power may never come to fruition. For now, the U.S. should continue to interact with China to the extent Americaâ€™s purposes are served. However, there is absolutely no reason for the U.S. to kowtow to the Chinese because of what they â€˜mightâ€™ become. There is more reason to believe China will be the catalyst to their own demise then to speculate their demise would come by the hands of another power which means ultimately America needs to do nothing to mitigate the emerging Chinese threat.
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World Fact Book from the Central Intelligence Agency