Will China catch up with the West?

Colonial powers held sway in China for nearly a century until Mao Tse-tung emerged victorious from the long-lasting battle in 1950. At this point, China became a sovereign state again. Mao did accomplish this, but his economic policy was a disaster. China was very poor when he died in 1976. The formerly accused and arrested “rightwing communist,” Deng Xiaoping, assumed power in 1978. This could have been considered a bold move for the Communist Party at that time, but also a desperate one. Deng was a pro-market economist and his coming to power was possible only because all other options had proved ineffective. He began his famous reforms in 1979. If we compare Deng to any other person in the socialist camp, it should be Bukharin, the leader of right-wing segment of the Russian Communist Party in the 1920s and 1930s, himself a renowned economist. He was shot in 1938 during the Moscow show trails. China followed a different course after 1979, one that is akin to what Bukharin proposed in 1929.


Choosing a publicly known advocate of market reforms – seen as opening the door for capitalism to take root in China after 28 years of communism – as premier was a risky venture for Chinese communists. However, the ‘Super Bukharin-ism’ of Deng Xiaoping worked so well that its successes have been beyond what anyone could have imagined. Even today, the momentum continues. In 2021, Chinese GDP grew by 8.1%. Public spending, loose monetary policy, export demand for Chinese goods in the time of corona; yes these all played a part, but the outcome is obvious. Asian economies performed better than Western economies during the pandemic, and China stands alone even among Asian tigers. The change of composition in economic activity that favoured real estate at the expense of industry in Q4 2021 struck a blow to the Chinese economy, the debt crisis of Evergrande being the prime example. However, as Gandalf said somewhere in the famous book of Tolkien, “things are now in motion, and that can’t be undone”.


The compound interest (growth) formula explains a great deal here. Consider the GDP of two countries at time t, the first being set at 100, the other at 373. The number 373 can look odd, and it is, but I cooked the numbers so the 20 year time span holds. If the less-developed country grows at a rate of 10% per annum and if the advanced country grows by 3%, a respectable rate at that stage of development, their GDPs will be equal at time t+20. In 20 years, it is possible to catch up with even the most advanced economy if indeed the challenger’s growth rate is more than triple the rate of the leader. To give another example, suppose the GDP ratios of the two countries at time t is ½. Then, even if the advanced country grows at a rate of 6.25% per annum, there will be complete catch up at time t+20 if the developing country grows at an average annual rate of 10%. Now that China is still growing at 6-7%, and the U.S. is growing at, say, 3%, China can catch up with the U.S. in a decade. This is a realistic assumption because although Chinese GDP growth is likely to fall, it can nonetheless achieve 6-7% growth for at least a decade. The slogan “Enrich yourselves” said to Chinese peasants 45 years ago has caught on and paid off handsomely.


Now, the sixth generation of Chinese leadership led by Xi Jinping is comprised of high-ranking party officials (“Tigers”) who were born in the 1960s. They are relatively young, although they are aging now, and both the party and the military are driven towards new targets by Xi. These new targets seem to be truly novel, including a balanced view of the economy in terms of the consumption/investment partition, a new army model, the fight against corruption, as well as the radical opening up of the current account etc. Xi is well-placed in the political centre, but he is not a typical “middleof-the-road” guy. In many ways, he is much more of a reformist than a moderate. He adamantly and openly pursued his declared goals after 2017.


The Party has changed rapidly over the last 5 years, and until the beginning of 2020, it bore the mark of Xi. Some commentators claimed that even in 2017 he wasn’t as strong as Deng once was, especially after the anti-corruption campaign which including the ‘New Gang of Four’. Four former political magistrates are serving life sentences on corruption charges. Xi was strong enough in

2017, obviously, but he may not be so strong today. The Politburo, the highest decision-making body, is composed of members roughly aged between 65 and 55. The bureau has been, admittedly, populated by comparatively young people – by the Chinese standards – since 2017 and the most trusted “young guards” (of Xi) have been promoted, both in the military and in the party. Stability and prosperity were the goals in 2017. Xi wanted to create a society where the living standards of more than 300 million people (20% of China’s population) would be on a par with Europe.

The Chinese growth model has changed under Xi. As the capital supplied overseas shrinks, so does the trade surplus. However, financial integration boosts and Chinese banks are everywhere. Gone are the days of relying on cheap export goods alone. However, party politics are the key to everything in China and nearly 60% of provinces have changed their party secretaries or main government officials in the last year. This appears to be a sweepingly radical seachange ahead of the 20th Congress. Many high-ranking party officials don’t think China is developing as fast as it was 5 years ago. So, Xi may no longer be the undisputed leader. His political power could be neutered before October 2022.


There was a time when China was thought to come back to square one by 2030, i.e. 32-33% of global GDP, as it was in 1820 (the pre-colonial era). This may not happen, but China will near that target by 2035-2040. One thing is certain: Europe as an engine of growth is dead. China is set to replace old colonial powers as a new focal point. Nobody can prevent that from happening because things are set in motion. The massive chance that has been underway since the June 2010 strikes – after which foreign firms operating in China granted wage increases to Chinese workers – is obvious even to the uneducated eye. This is a stupendous change because, for the first time in history, an incredibly large population has a better life and effectively demands goods and services they couldn’t even dream of two decades ago. In China, wages and salaries have been on the rise, and the new phase of the business cycle has nothing to do with the 1990-2000 boom. To put things in perspective, in 1990, Chinese GDP was 1/8 of Italy. Back then, wages were lower than Mexican wages; now they are one-third above them.


Can such a power be “contained’”? No, it cannot. Originally “containment” was used for the USSR. George Kennan’s “Long Telegram” has been famous for over half a century, but perhaps unduly so. True, the U.S. was able to “contain” the USSR during the Cold War. Nevertheless, this could only happen because the Soviet model embodied a kind of self-containment device already. The USSR was an over-stretched empire, geographically, culturally, religiously, ethnically, ideologically and economically. Such a large domain was uncontrollable either from within or from afar. Today’s China is nothing like the USSR of the 1950s. China exports, China imports, China invests, and China hosts large overseas investors. China is everywhere. China is – perhaps out of necessity – building a huge and ocean-wide patrol-like global navy, but it doesn’t seek direct political hegemony anywhere. We are looking at two different models.


One couldn’t and can’t geographically “contain” Russia. Russia is by definition huge. Even distinct regions of Russia are huge. Yet its economic and political influence could be and was contained. This is untrue for China. China is also territorially large, but it is culturally and ideologically compact except for a few weak spots, its mixed economic model is appealing to masses, and it is politically stable. China doesn’t talk about communism, and is indifferent to other nations’ ideologies as long as doing business is profitable in the long-run because Chinese leadership thinks strategically. The problem with China is the administrative capacity of the Communist Party to run a latter-day state capitalism that addresses about 1.5 billion people. Moreover, there is need for every kind of natural resource one can imagine. And the model carries risks; it can become obsolete or get out of steam. There are risks and some analysts are eager to pinpoint them. Yet China will pursue its course and will probably catch up with the U.S. eventually. I pen in at least 6%, maybe 6.5% GDP growth for 2022.

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