March 26, 2021
Peak China Is Around the Corner
“Let China sleep, for when she wakes she will shake the world”. This quote, attributed to Napoleon Bonaparte in 1803, summarizes both the decrepit state of China under its last dynasty, the Ching, and the obvious potential of such a massive and rich civilization. Three of the most important implements of modern life, paper, printing, and gunpowder, were Chinese inventions. But for most of the last 200 years, China has been preyed upon rather than shaking much of anything.
The Ching dynasty collapsed in the early 20 th century, giving way to decades of warlordism and instability that culminated in the Japanese invasion of 1937, and finally ended with the victory of Mao Zedong and the Chinese Communist Party (CCP) in 1949. But China remained in self-imposed isolation and weakness for another generation.
Mao’s “Great Leap Forward” from 1959 to 1962, when he tried to force China to transform into an industrial power, just resulted in mass famine and the deaths of over 40 million, in what was the greatest mass killing in human history. Mao followed that up with the utter turmoil of the “Cultural Revolution” from 1966 till his death in 1976, where he used inflamed mobs to impose a state of constant conflict and ferment in the service of ideology, and at the expense of any competent economic management.
But after Mao’s death the CCP came to be dominated by leaders who wanted to develop China. They slowly, and then more rapidly abandoned Communist orthodoxy, and carried out successive reforms that allowed China to begin to modernize. This process was greatly facilitated by American policy from the early 1970’s till Donald Trump.
Nixon in the early 70’s decided to play the “China Card” against the Soviet Union, bringing China into an anti-Soviet understanding, though not an outright alliance. By the end of the 1980’s, the Soviet Union was in its death throes, and the need for a China Card diminished. But at that point, the US and Western business interests saw China as a potential manufacturing hub endowed with unlimited quantities of docile and cheap labor. The era of outsourcing was on.
In the early 1990’s China and India had roughly the same GDP per capita, but while India grew, China soared over the next 25 years. Chinese living standards rose to over double Indian, while China became the factory of the world, with more manufacturing output than the US, Germany, and Japan combined.
The extremely high growth rates, particularly seen in the 2000’s, combined with China’s population, now over 1.4 billion people, gave rise to a cottage industry embracing the notion that China was destined to dominate the globe and displace the US as the world’s preeminent power. This idea was accepted with trepidation by Americans, and embraced with some glee by non-American critics of US power.
But just at the moment where this view of coming Chinese dominance became conventional wisdom, the actual underlying historical trends turned, and China’s rise is about to peak and then head toward a relative decline in importance. Several major factors are giving rise to this dramatic and unappreciated coming reversal. The biggest is the population bust.
China instituted an extremely coercive and harsh population policy in 1980 that limited families to one child only. A whole generation has now grown up without siblings, cousins, aunts, and uncles, but the policy did work. China’s population growth slowed sharply. The price though is going to be catastrophic. China is growing old before it has grown rich. Its median age exceeded the US this year, and annual births have dropped to under 15 million. Given the preference for males and selective abortion, there is an even bigger shortage of girls, which will limit the next generation’s births. Economically, this means that China is going to have an aging, shrinking population with a massive number of elderly.
Currently China has 9 working age adults for every senior, in 2050 it will be only two. China’s workforce is going to shrink by 200 million in the next 40 years, a stunning amount given that the entire US economy has 150 million workers. This shrinking labor force means that China is no longer the destination for offshoring Western production as cheap labor will no longer be plentiful. It also means that China’s annual economic growth rate will slow substantially, in fact it has been dropping every year for the last decade and is now running less than 6% in official statistics, and likely 4% in real terms as Chinese inflation of economic data is a constant. Depending on assumptions, China’s current population of 1.45 billion people is set to shrink to between 750 million and a billion by 2100.
China also faces the economic consequences of becoming a middle-income nation. There is something known as the “middle-income trap” where developing countries modernize to a certain level, but then cannot sustain the high growth rates needed to fully converge with developed country living standards. This has been seen especially in Latin America, but also in Portugal and Greece, and in the Arab World. Usually this trap results from political and economic structural constraints that prevent a country from fully modernizing. For China, the need to maintain a one-party state in which the CCP controls everything, will play that role. China can never fully modernize its economy while keeping the CCP in charge.
Secondly, the US and EU no longer see Chinese economic growth as benign. The Trump administration’s blundering attempts to constrain China mostly failed, but Biden has kept the approach while substantially upgrading the sophistication of the methods. China will no longer have the wind at its back in global economic competition.
The other major constraint on China’s rise is that the dominant power, the US, is not standing still. American companies have dominated the cutting edge technologies of the 21 st century, as reflected by the market value of the FAANG companies (Facebook, Apple, Amazon, Netflix, Google). While the US has only 330 million people compared to China’s 1.4 billion, American power does not exist in isolation. At a minimum, the US is part of a four-power Anglo-Saxon alliance of Australia, Canada, US, and UK. Combined they have about 450 million people. More importantly all four nations remain open to immigration and are very adept at turning immigrants into patriotic citizens in one generation. Over 25% of the children born in the UK this year are to immigrant mothers. By 2100, this core Anglo-Saxon group will number perhaps 600 million.
But beyond the shared English-speaking nations, the US has its NATO allies along with Israel, Japan, South Korea, and Taiwan. Other looser allies include Thailand, Indonesia, Philippines, Saudi Arabia, and Ukraine. Add in nations that share a common anti-Chinese outlook such as India and Vietnam, and China is fast running out of possible friends that matter. China’s foreign policy is based on bribing friendship with its infrastructure projects, but it has to settle for fairly useless places like North Korea and Myanmar. This lack of significant friends explains the geopolitical importance of Pakistan to China, and why China is willing to spend such massive amounts of money to upgrade Pakistan’s economy. It is not an act of charity. Pakistan is the only major nation in the world that China can bring onside, and it will do everything it needs to achieve that.
China is also constrained by very unfavorable geography. The US has open access to both of the world’s oceans, add in Australia, America’s NATO, East Asian, and Middle East allies, and the US reach is unimpeded around the globe. China is bounded by Siberia to the north, the Himalayas to the south, the deserts of Central Asia to the west, and its access to the Pacific is blocked by the islands of Japan, the Philippines, and Indonesia, backed up by the US bases at Guam and Okinawa.
China will continue to grow and prosper over the next two generations, and its living standards will rise further. But it is not going to topple the Anglo-American behemoth, its soft cultural power is non-existent, and it will not grow fast enough to overtake the US economy in size even with its fourfold advantage in population.
Peak China will happen soon, and then the world will realize that not much really has changed, just as peak Japan in the late-1980’s failed to ultimately alter the global order.
