It is a common belief that China will replace the U.S. as the world’s hegemon. Many analysts argue that the 21st century will be a “Chinese Century” similar to how the 20th Century was the American Century and the 19th Century was the British Century.
In fact, in October 2014, it was reported that China had already overtaken the U.S. as the world’s number-one economy. The news prompted many to report that the American Century was already over.
Further inspection shows a very different reality. Reports that say China’s economy is larger than America’s measured economic size in GDP adjusted for Purchasing Power Parity (PPP). PPP adjusts a country’s GDP to take into account different prices and inflation rates.
A famous example of this is the Economist’s Big Mac Index. Let’s say a Big Mac costs the equivalent of $2 in China but costs $4 in the U.S. This would mean that the PPP in China is twice that of the U.S. Thus, if one adjusted China’s GDP for PPP, one would have to double it when comparing it to the U.S.
In short, GDP adjusted for PPP takes the sum of all goods and services produced and values them at American prices. Currently, China’s GDP is worth $17.6 trillion based on PPP while America’s is $17.4 trillion.
However, while PPP is a good way of measuring the living standards of a population, it is a poor metric for determining the relative power of a nation. First, many economists dislike using PPP due to how much prices vary from country to country. Since the prices are obviously much lower in China than they are in the U.S., China’s GDP becomes incredibly inflated when looking at PPP.
Second, national power is not measured in how easy it is to buy a Big Mac. As Fareed Zakaria points out, “[international power] depends on foreign aid and oil and international investments and aircraft carriers and for all of that you need real hard currency”.
If one looks at nominal GDP, the U.S. is still way ahead. Without adjusting for PPP, the U.S.’s GDP is $17.4 trillion while China’s is $10.4 trillion. Furthermore, it is unlikely that China’s nominal GDP will exceed America’s anytime soon, if it does so at all.
Predictions that China will overtake the U.S. in the near future assume that China will continue to grow at a tremendous rate. For example, the Economist predicts that China will overtake the U.S. in nominal GDP by 2021 if China’s growth remains at an average of 7.75 percent for the next decade. However, it is unlikely that China will have a growth rate that high. China’s growth last year was 7.4 percent. The World Bank estimates that China’s economy will grow by 6.9 percent in 2015 and 6.8 percent in 2016.
From then on, it gets even worse. Jeffrey Kleintop, chief global investment strategist at Charles Schwab, predicts that China’s economy will grow at a rate of five percent and below in the coming decade.
China’s growth is slowing for several reasons.
First, nothing goes up in a straight line forever, especially when it comes to economics. The other Asian Tiger economies grew at a rate of 9 percent for a couple decades before petering out at five to six percent or less. China has already had an average growth rate of 9.91 percent for over 30 years and is past its time.
Second, China’s investment strategy is very inefficient. The Chinese are spending huge amounts on apartment blocks, highways, airports, and high-speed railways. However, the returns on these investments are quickly diminishing since there is simply not enough demand for what China is constructing. One fifth of urban housing is unoccupied. Prices in China’s top 100 cities have been falling for seven months straight. When I visited Beijing in 2012, I saw a huge shopping mall that was virtually deserted. At best, China will have to adjust to a significantly less ambitious growth model to avoid a crash. At worst, China’s property bubble will burst, creating a similar situation to what happened when America’s housing bubble burst in 2008.
Third, and perhaps worst of all, China is facing a demographic disaster. While the one-child policy has been effective in curbing population growth, it is starting to create nasty side effects. The UN estimates that China will lose 400 million people in the next 25 years. As this occurs, China’s population will begin to “gray” as the old outnumber the young. The National Bureau of Statistics says that China’s working age population is already on the decline. This is damning since China’s main economic advantage has been its massive pool of cheap labor. Paul Krugman estimates that the demographic crisis will cause the investment rate to fall by 20 percent of GDP.
Japan faced a similar crisis in the 90s. Although many observers in the 70s and 80s predicted that Japan would become the world’s largest economy, Japan’s shrinking and graying population ensured that this did not happen.
Even if China overtakes the U.S. as the world’s largest economy, that won’t make it a global superpower. After all, the U.S. economy overtook Britain’s in the late 1800s and Germany surpassed Britain in 1901. Yet Britain would remain the dominant world power until 1939 and the U.S. would not become the hegemon until 1945. Germany never became a global superpower.
Being a global hegemon is about more than just having more money than everyone else; it is about being able to project power throughout the world.
China is unable to do this because of simple geopolitics. In order to project power globally, one must be safe enough at home to have a surplus of security. Britain is an island and was thus separated from potential threats by water and bad weather. The U.S. is flanked by vast oceans and the two nations that border it have never posed much of a threat.
Thus, both countries could afford to spread their foreign policy attention and military resources across the globe.
On the other hand, China is surrounded by potential adversaries. It has India to the southwest, the ASEAN nations to the south, the Philippines, Australia and New Zealand to the southeast, South Korea, Japan and Taiwan to the east, and Russia to the North (not to mention the string of American military bases that surrounds China).
All of these nations have reasons to fear a rising China and many of them have historical hostilities with the Middle Kingdom. While none of them pose a serious threat on their own (except perhaps Japan and India), together they form a formidable barrier that will keep China focused on its own neighborhood rather than the globe.
While China has long accused the U.S. of pursuing a Cold War-style containment policy, the reality is that it doesn’t have to. Containment is the de facto geopolitical situation that China finds itself in.
This is not to say that the U.S. should not be concerned by the rise of the Middle Kingdom. While the Dragon may not replace the Eagle, it could displace it from its throne. While Germany never replaced Britain, it certainly played a major role in the fall of the British Empire.
However, even if the U.S. falls from it position as the world’s most powerful nation in the near future, a billion people hoping for a Chinese Century will be disappointed.