China is a continent and an ancient civilisation whose technological and scientific prowess once led the world. A fifth of the world’s population is Chinese. If ever its 1.3 billion people could unleash its economic potential, as Napoleon once famously remarked, it would shake the world.
That is what seems to be happening now. Since 1978 China has burst back onto the world scene in a manner only paralleled in scale and speed by the rise of the USA between the Civil War and the First World War. The Olympic Games seals an extraordinary comeback. The open question is whether the 21st century is going to be Chinese, in the way the 20th century was American and the 19th century was British. Already China is making a difference on oil and food prices, finance and the pattern of world trade; and that could just be the beginning. The answer is one of the most important of our age.
But this is not another ‘watch-out-China-is-coming’ article – ready to eat us for breakfast, lunch and supper as Digby Jones, former director-general of the CBI and now trade minister, likes to say. Quite the contrary. Although China’s achievement over the past 30 years in bringing 400 million out of poverty while managing to introduce some of the elements of a market economy must be admired, troubles lie ahead. Inflation at a 12-year high, growth of carbon-dioxide emissions and a lack of innovation all point to systemic malfunctions. Rather than over-exaggerating China’s potential, we should see it for what it is – a still desperately poor country beset with difficulties that in many respects is a subcontractor to the West. The West should embrace and help China, rather than be awed and bullied. Above all it should stay open.
This analysis may seem contrarian, even maverick. But China is everywhere broaching the limits of its capacity to continue as it has. It is reaching the limits of how much longer its banks can carry on directing billions of dollars of savings into investments that produce mean returns and on which interest is irregularly paid – the heart of its economic miracle. It is reaching the limits of how much longer its peasants can supply savings in ever-greater quantities to fuel that investment. It is reaching the limits of the capacity to increase its exports of now one trillion dollars by 25 per cent a year, in any case largely made by overseas companies. It is reaching the limits of acquiring foreign exchange reserves to manage its exchange rate, which in 2007 grew at an astounding $650 billion without generating colossal inflation. Even the Chinese cannot insulate their financial system from the impact of printing $650 billion and so fuelling inflation.
Nor are the limits solely economic. Out of a working population of nearly 800 million, 200 million people are migrants, chafing at their lowly status and indifferent wages. And there is a first order internal ideological crisis over how a communist party that proclaims it remains the trustee of the 1949 Revolution can claim monopoly power when it has also declared class war over.
Behind all these problems lie China’s half conversion to capitalism. It is more accurately a system of Leninist corporatism. Everything in China – from enterprises to the remotest village club – is subject to the pervasive direction and control of the Party. This was useful when the de facto leader Deng Xiaoping launched the reform programme in 1979. Now it is stunting economic growth.
