China’s Growth Trajectory & Implications for the United States

  • Analysts predict China will be the world’s largest economy within 20 years.
  • China owns 8% of U.S government debt, worth US$1.16 trillion.
  • U.S government needs to rein in debt levels to preserve its economic power. Despite the challenge this poses, country’s like Sweden have succeeded from similar past positions

Most people have been amazed at the economic and social progress China has achieved in recent times.  However, in the words of Winston Churchill, what we have seen to date is likely to only be the ‘end of the beginning’.

Niall Ferguson is a Professor of History at Harvard Business School and a prolific commentator on contemporary politics and economics.  We occasionally draw insight from his papers.

In February 2011, Niall released a paper titled ‘In China’s Orbit’ that provides perspective on China’s growth and how its influence may shape the global economy in the future.  Given that China is Australia’s biggest export market, accounting for 22% of our exports in 2009, expanding our understanding of China will become increasingly important.  Below we have summarised some of Niall’s key points from his paper:

  • 40 years ago, the average American was up to 70 times richer than the average Chinese.  This gulf developed from ‘the West’ developing six ‘killer applications’ that ‘the Rest’ of the world lacked and were key to Western ascendency:

Competition

Political fragmentation in Europe fostered competition amongst multiple corporate entities

Scientific Revolution

Most major 17th century breakthroughs in maths, astronomy, physics, chemistry & biology occurred in Western Europe

Rule of Law & Representative Government

Optimal system of social & political order emerged based on property rights & legal representation

Modern Medicine

Most major 19th & 20th century advances in health care, including control of tropical diseases, occurred in Western Europe & North America

Consumer Society

Industrial Revolution supplied productivity enhancing technologies & demand for better & cheaper goods

Work Ethic

Westerners were first to combine more extensive & intensive labour with higher savings rates, permitting sustained capital accumulation

  • Following the Second World War, many East Asian countries began to copy the West’s industrial model, beginning with basic manufacturing and then moving up the value chain.

Of the six ‘killer applications’, these countries largely bypassed Competition and Representative Government and instead focused on science, medicine, the consumer society and work ethic.

  • Today, many of the large economies like Hong Kong, Japan, Singapore and Taiwan have achieved per capita GDP (i.e. the income generated by each person) close to or above the United States.  In contrast, China currently sits at 19% of the U.S per capita GDP.  In the decades ahead, this gap will surely close as it did for the other countries in the region.
  • Of all the industrial revolutions, China’s has been the biggest and fastest.  In the last 26 years, China’s GDP (i.e. total value of goods and services produced by the economy) grew by a factor of 10.  In the U.K, it took the 70 year period from 1830 to 1900 during the industrial revolution for its economy to grow by a factor of four.

After recently overtaking Japan as the second largest economy in the world, some analysts predict China will overtake the U.S by 2027 – just 16 years away.  It is currently on the cusp of overtaking the U.S as the world’s largest manufacturer of goods.

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