When Barack Obama visited China recently to meet Hu Jintao, his opposite number, the symbolism was poignant.
The former presides over a battered economy that is the world’s largest debtor and in need of a significant re-boot, while the latter holds sway over an economic powerhouse, a geopolitical rival and America’s most important creditor, with $2,300 billion (£1,394 billion) in foreign exchange reserves, mostly in US dollar instruments.
However, the conviction that this was further evidence of a post-crisis acceleration in the struggle for global dominance has taken on feverish proportions. Like a fever, it is blurring sensibility and leading to muddled and dangerous thinking.
The crisis has left the United States (and Europe) to repair the damage to financial and fiscal systems, and trust in financial institutions and products.
It also marked the end of a 25-year-old economic growth cycle, based on credit, over-consumption and baby boomers. It will take a long time for a new model, based on high employment, innovation and low carbons, to emerge.
The scale and importance of this structural change should not be underestimated, though, if any nation can make the transition successfully, the US is the principal candidate.
The good news for China (and other emerging markets) is how quickly they have bounced back from the crisis — in some cases, stronger. To a significant extent, this is down to significant public policy stimulus, nowhere more so than in China, which is now implementing a stimulus programme of 13 per cent of GDP and having injected bank loans worth 30 per cent of GDP into the economy.
However, the dangers of excessive credit creation are self-evident — witness again, Dubai — and it would be dangerous for China to carry on, waiting for world exports to come back, as though the world had not changed. Structural change, specifically stronger emphasis on the rural economy and consumption, is also vital for China.
China is still a poor country. Notwithstanding the complexities of measurement, income per head, according to the World Bank, is roughly $3,000, a little less than Jordan and Tunisia.
In the extreme scenario in which US income per head remains the same forever more, and China’s income per head grows by a constant 8 per cent a year, convergence would happen in 2045. But this is silly maths.
The US will not stand still and China’s economic path is likely to be punctured sooner or later by a credit or asset crisis.
Further, it cannot grow by 8 per cent a year for that much longer, not least for demographic reasons. China is the fastest-ageing nation on Earth, with an age structure rather like that of Germany.
Its labour force will begin to decline in 2010 or so and fall every year for the foreseeable future. For a while, the transfer of the 80 million rural migrant pool to higher-productivity urban jobs will mask much of this impact, but only for a few years.
By 2040-50, China will have more people aged over 65 than the entire predicted population of the US. In fact, on every demographic measure, China will be worse off than the US by the middle of the decade.
Moreover, large domestic imbalances, recognised by China’s leaders, reside in large gaps between rural and urban incomes and living standards, an exaggerated heavy industry sector that generates huge undistributed profits and savings, and a consumption share of GDP that is a mere 35 per cent. They reflect the prioritisation of coastal province export and heavy industry development over the countryside, which still accounts for two thirds of total employment.
Rural reform began well in China after 1978, but it went awry as the leadership crafted a global export-oriented economy.
The legacy of the economic crisis has been to weaken the US, but also to expose China’s imbalances as economically and politically untenable, and contrary to the nation’s self-interest. This represents a huge political test for the Communist Party and for China’s “harmonious development” over the next decade.
Global imbalances, too, could yet undermine China’s financial stability. China, one-sidedly, holds the US responsible for those imbalances, wrongly criticises US fiscal and monetary policy responses to the crisis as destabilising and curiously alleges that a weak US dollar and low interest rates are generating a new asset bubble.
Talk about the pot calling the kettle black.
Global imbalances, historically, reflect conflicted monetary policies and sometimes end up in crises, in which creditor-export giants in the global economy pay a higher price than their debtor-import opposites.
The former fail to adapt domestically and to their new global roles and tend towards competitive devaluation and credit expansion to maintain the status quo. Think America (1920s), Germany (1960s) and Japan (1980s). China will probably allow the yuan to rise again early next year, but it will be incremental, inadequate and almost irrelevant in the absence of other developmental change.
Meanwhile protectionism, from which China would lose more than the United States, is spreading through trade and finance and could intensify ahead of American congressional elections next year, as China faces a backlash to its relentless expansion of industrial capacity.
No one can dispute, or regard as unwelcome, China’s economic and political emergence. That it will continue to catch the West is beyond doubt.
However, it will take a generation, rather than a decade or two, if at all, to cross the barriers of financial instability, structural change, inadequate institutions, ageing and the highest levels of technological innovation.
By 2030, China will still be a relatively poor country and we cannot know how, or even if, her external and internal contradictions will be resolved, or what the social consequences might be.
A shift in global power is occurring glacially, but is a long way short of the kind that occupies the feverish commentary around the world. Best to keep taking the tablets.
• George Magnus is Senior Economic Adviser, UBS Investment Bank. He is author of The Age of Aging (John Wiley, 2008), and of Uprising: will emerging markets shape or shake the world? (to be published, John Wiley, 2010)
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