Why China Won't Rule the World

Conventionalwisdom can be devilishly hard to dispute. For example, most punditsagree that the Great Recession helped China more than any other state.At first glance, this claim seems obviously true. Unlike the UnitedStates and the other major Western powers, which saw their economiesplummet and their financial institutions come close to ruin, theChinese economy has kept on growing. Chinese financial institutions,considered technically insolvent only a few years ago, now boastbalance sheets and market capitalizations that Western banks can onlydream of. With its economy expected to grow at 9 percent in 2010, Chinawill soon surpass Japan as the world's second-largest economy (measuredin U.S. dollars). Pundits like Martin Jacques, a veteran Britishjournalist, are predicting that China will soon rule theworld—figuratively, if not literally.
  
Yet before declaringthis the Chinese century, you might want to take another look at what'sactually taken place in the country over the past year.
   
Oneof the strangest things about predictions of Chinese dominance is thatthey tend to impress everyone but the Chinese themselves. Take China'ssupposedly miraculous economic recovery. While the internationalbusiness community has practically run out of words to praise Beijing'shandling of the crisis, Chinese leaders haven't stopped worrying. Theyfret that their banks have gone on a reckless lending binge; LiuMingkang, China's chief bank regulator, warned in September that "allsorts of risks have risen" as a result. He's right. In the first halfof 2009, Chinese banks shelled out roughly $1.2 trillion, creating apotential tidal wave of future nonperforming loans. State-ownedenterprises (SOEs) used much of the money to speculate in thereal-estate and stock markets and to make questionable expansions; as aresult, Dragonomics, a Beijing-based consultancy, now estimates that asmuch as one sixth of all the bank loans made between 2008 and 2010could end up not paying off. Yet Beijing is still wary of shutting offthe spigot, lest China prove unable to keep growing without it.
  
Its leaders' frequently voiced trepidation may be overstated. Perhapsthe officials are simply being modest or trying to soothe Westernworries about the so-called China Threat. It's far more likely,however, that China's leaders are actually telling the truth. They knowtheir country has indeed pulled off the world's most impressiverecovery. But they also know that's a relative -accomplishment—andChina has paid a huge long-term price in the process. In addition tosowing the seeds for future dud loans, its investment-focused stimuluspolicies have exacerbated the country's economic imbalances by creatingnew productive -capacities—factories and the like—without reallyboosting China's anemic household consumption. In other words, Chineseplants may be cranking out even more TVs, cars, and toys than before,but no Chinese are buying them. Loosened bank credit has mainlybenefited SOEs, allowing these inefficient behemoths to expand at theexpense of the private sector, which has been given little access tothe government's largess.
  
Meanwhile, China has yet toconfront what has become an enormous overcapacity for producing cheapgoods. During the boom, when Americans were hungry for these products,Chinese exports registered double-digit growth year after year,accounting for nearly a quarter of the country's net GDP growth. Nowthat nervous and debt-ridden U.S. consumers have virtually shut theirpocketbooks, China can no longer expect them to snap up its wares. Toaccount for this change, Beijing must embark on some painfulrestructuring, shuttering many export--oriented factories andstrengthening the social safety net to boost household consumption(which remains stuck below 40 percent of GDP). China's leaders know allthis. But they've yet to take the plunge.
  
Dig a bit deeper,and it becomes very difficult to pin down just how exactly China hasgained so much from the crisis. Its failures are much more evident.Take Beijing's lack of success in snapping up prized assets overseas.For several years, Chinese leaders have aimed to secure foreign naturalresources by acquiring effective control of or stakes in oilfields,mining companies, and commodity producers in other countries. Beijingis convinced that such moves are essential for its long-term security.Yet opposition by Western politicians, entrenched multinationals, andvigilant governments in developing countries has stymied many attemptsby cash-flush Chinese SOEs to execute their government's master plan.During the first months of the crisis, these SOEs and China'ssovereign-wealth fund did nab modest stakes in a few minornatural-resource companies. But they failed to score a big hit, andthere were some embarrassing failures. In late 2008, for example,Chinalco (a state-owned Chinese aluminum company) reached a tentativeagreement to pay $19.5 billion to increase its stake in Rio Tinto, aglobal mining giant. But fierce shareholder opposition and theskepticism of Australian regulators doomed the deal, to Beijing'sintense frustration. To borrow a colorful Chinese proverb, Chinalco sawits "cooked duck fly away." This ignominious setback served as anuncomfortable reminder of the humiliation of 2005 when CNOOC, one ofChina's state-owned oil companies, was prevented from taking overUnocal, an American energy producer, by congressional opposition.
  
Another puzzle: if China is so strong, why doesn't it show moreleadership in addressing global problems? While Chinese officials showup at almost every important gathering of world leaders, and theiropinions and support are eagerly solicited, they consistently maintaina low profile, preferring to focus on guarding their national interestsand skipping opportunities to showcase their soft power. At the G20summit in London in April 2009, for example, the only thing China caredabout was keeping Hong Kong off the list of offshore tax havens beingscrutinized. Beijing's coffers may be bulging with $2.1 trillion inforeign-currency reserves, but it is not exactly offering to spend thatcash on common crises. Besides calling for a new international reservecurrency, China has remained mostly silent on how to reform the globalfinancial system. Nor did it take charge in advance of themake-or-break Copenhagen climate-change conference in December 2009.Beijing's foreign policy remains stuck in a reactive mode; if this is asuperpower, no one's told the Politburo yet.
  
Still, mostChinese leaders seem unconcerned with their inability to translatestrength into real gains on the international stage. That's becausethey're far more concerned with domestic stability. Yet here again thenews is hardly reassuring. Antigovernment riots and collective proteststhroughout China are on the rise. Corruption remains rampant. More thana dozen senior officials, ranging from a vice minister of publicsecurity to several CEOs of giant SOEs, were arrested in 2009. Thepolitical maneuvering for the next succession, due in 2012, has alreadybegun, making Chinese leaders all the more cautious—even a tiny misstepbetween now and then could be politically catastrophic.
  
Theworst news on this front has been the reemergence of ethnic separatismin China's restive, but resource-rich, border regions. The bloody riotsof July 2009 in Urumqi, the capital of Xinjiang, killed nearly 200 andwounded more than 1,000, making it China's worst ethnic conflict inthree decades. Coupled with the Tibet problem, the challenge by theUighurs to Chinese rule will preoccupy the minds of Beijing's rulingelites for years to come—and keep their sights firmly fixed on mattersdomestic.
  
All this helps explain why, while China's leadersmay be mightily relieved to have escaped the worst consequences of theworld economic crisis, they see no cause to celebrate. True, the crunchenabled China to close the economic gap with its badly ravaged rivals,particularly the U.S. and Japan. And popular perceptions of new Chinesestrength have allowed China's leaders to bask in the global limelightand flaunt their elevated international status to the Chinese public.Deep down, however, Chinese leaders are no fools. They understandperfectly well how tough are the challenges they still face—and howquickly fortune can turn. If only foreigners knew this as well. Ofcourse, the Chinese are thrilled that everyone thinks they're thebiggest winner. The truth, however, is that they're more like theleast-bad losers—and they know it.
Minxin Pei                                                                                                                                                                                                                Newsweek, December 8, 2009

Loosened bank credit has mainly benefited SOEs, allowing these inefficient behemoths to expand at the expense of the private sector, which has been given little access to the government's largess. -

household consumption (which remains stuck below 40 percent of GDP).-worrisome