5 Reasons to Stop Fearing China


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Mr. Gao co-found and became the CFO at Oxstones Capital Management. Mr. Gao currently serves as a director of Livedeal (Nasdaq: LIVE) and has served as a member of the Audit Committee of Livedeal since January 2012. Prior to establishing Oxstones Capital Management, from June 2008 until July 2010, Mr. Gao was a product owner at Procter and Gamble for its consolidation system and was responsible for the Procter and Gamble’s financial report consolidation process. From May 2007 to May 2008, Mr. Gao was a financial analyst at the Internal Revenue Service’s CFO division. Mr. Gao has a dual major Bachelor of Science degree in Computer Science and Economics from University of Maryland, and an M.B.A. specializing in finance and accounting from Georgetown University’s McDonough School of Business.

Its economy is going gangbusters, and it barely felt the global recession that has left the world’s most advanced nations with a nasty hangover. It has cornered the market on some of the world’s most valuable minerals. It has a fancy new stealth fighter, proof that it can turn out world-class technology. And its parents are raising overachieving kids who seem way smarter than the slackers slouching around in America’s schools.

China is clearly on a roll. President Hu Jintao’s recent visit to Washington, replete with a formal state dinner, put China’s leader on a par with President Obama and the world’s most powerful politicians. Many in China feel it’s finally their time to displace America as the world’s preeminent power, a turnabout that’s on the minds of many Americans, too. In a recent Pew Research poll, an astounding 47 percent of Americans said that China is the world’s leading economic power, while just 31 percent felt that the United States is No. 1–a complete reversal of Americans’ views just three years ago. As if that’s not enough, the new bestseller Battle Hymn of the Tiger Mother, by Amy Chua, trumpets the superiority of demanding, Asian-style parenting over the indulgent coddling that American parents prefer. Now that really hurts.

China does represent a remarkable story of progress, and since it’s technically a Communist country–which relatively few Americans have ever visited–it’s not surprising that Americans find it somewhat scary. Still, it’s like a mouse tormenting an elephant. “I find it very amusing,” says Wei Li, a professor at the University of Virginia’s Darden School of Business, who also teaches at the Cheung Kong Graduate School of Business in Beijing. “China has gone through an extraordinary growth period, but it’s going to take China a long time to realize American levels of prosperity.” He also points out that Americans had similar fears of Japan becoming the world’s dominant power in the 1980s–right before Japan went into a 20-year swoon from which it still hasn’t emerged.

So the next time you’re gripped with fear about the prospect of life under a Chinese boot heel, take a deep breath and keep these points in mind:

China still has a middling economy. China’s population is four times that of the United States, yet its GDP is just two-thirds as large. That makes China an important economic power, but hardly the world’s most dominant. China’s per-capita GDP–which measures the productive capacity of the population as a whole–is just $7,400, which ranks 128th out of 230 nations, according to the CIA World Factbook. (The United States, with per-capita GDP of about $47,000, ranks 11th, after a handful of tiny nations like Qatar and Liechtenstein with concentrated wealth and a minimal underclass.) The number of poor people in China is probably greater than the entire population of the United States. And vast stretches of China’s interior remain untouched by the impressive modern infrastructure that makes China’s coastal region highly productive.

Given China’s size, ambition, and industrial capability, it’s inevitable that China’s economy will become the world’s largest. But it’s worth keeping in mind that 30 years ago, China was nearly as backward as North Korea is today, with little external trade, a population that was mostly poor, and a government that could barely prevent mass starvation. China’s progress since then has been unprecedented, but it still has a long way to go before lifting the majority of its people out of poverty and raising overall living standards to anything near western levels.

Paranoid Americans (or Europeans, or Japanese, or Koreans) may think China’s goal is to somehow conquer them, but China’s leaders are overwhelmingly focused on creating jobs and raising living standards for their own people. Failing to do that could provoke class warfare and open rebellion, one of the biggest fears of China’s leaders. That’s why China will continue to pursue aggressive economic policies meant to boost growth by 7 to 10 percent per year–for the next 10 or even 20 years. But at some point growth will slow and China will start to resemble a mature western economy–with a lot of economic power, but also the bureaucracy, special interests, and destructive speculative behavior that tends to bog capitalism down. China will be no more able to dominate America than America has been able to dominate China.

It desperately needs the United States. China’s rapid growth depends on a huge stream of consumers to keep buying the stuff it makes. And Americans are China’s best customers. Worries about the U.S. government being too dependent on China to finance its debt are legitimate, since China is the top purchaser of U.S. government securities, with about 21 percent of all holdings. But the real problem is Washington’s overdependence on debt, not the portion held by China. It’s also true that Chinese officials sometimes overplay their hand, which may be the case with reported restrictions on the exports of rare-earth metals found largely in China, which are key components in many high-tech devices. Still, that kind of maneuvering is standard capitalist fare (commodity traders in New York and London try to corner markets all the time) and China is likely to exploit its own resources just as every other capitalist nation has done.

Alarmists tend to worry that China’s self-interested behavior could become a form of economic terrorism. That’s a stretch. “The Chinese ideology has changed from Communism to GDPism,” says Li. “Nothing matters except that the economy grows.” Communist Party officials even earn perks and promotions based largely on their contributions to economic growth. So by that logic, China will carefully cultivate its relationship with the United States as long as it needs our business. Which is likely to be a long time. Long after China becomes the world’s largest economy, it will still depend on heavily on trading partners, just as the United States does today. In fact, it’s hard to imagine a scenario in which China could get wealthy, or stay wealthy, without the trade that has done far more to lift it toward world-power status than any other factor.

The richer China gets, the more it will buy. During a recent visit to Spain, a key member of China’s Politburo pointed out that if every person in China bought one bottle of Spanish wine and one container of Spanish olive oil per year, Spain would run out, with nothing left to offer the rest of the world. The rise of China’s consumer class may be the most powerful economic force of the next 100 years, and China won’t be the only beneficiary. As Chinese consumers earn more disposable income, they’re beginning to covet the same cars, appliances, gizmos, and luxury items as everybody else in the world. Western business leaders are right to demand that China crack down on piracy and welcome foreign-made goods on the same terms that other nations import products made from China. But as China becomes wealthier and more dependent on trade, it has incentives to do just that.

One reason Chinese consumers haven’t made much of a mark yet is that they’re still some of the thriftiest people on the planet, with a savings rate that’s close to 50 percent. (The U.S. savings rate, by comparison, is about 5 percent, up from nearly zero a few years ago.) But Chinese consumers are nearly certain to spend more as credit becomes more commonplace, mass marketers work their black magic, and the first generation of affluent consumers begins to retire in a few years, which will force them to spend down their savings. Even if those consumers do buy mostly Chinese-made goods, that could divert some of China’s exports to internal markets, creating new openings for exports from America and other nations.

China’s military might is overblown. If you’re worried about a Chinese stealth fighter dropping bombs on your neighborhood, you can relax. The staged leak of recent photos showing a “secret” Chinese-made stealth aircraft generated terrific front-page drama and got the world’s defense contractors excited about another arms race. But it was more of an exercise in national pride than in aeronautics. As China becomes richer in coming decades, it could well end up with the world’s biggest military budget. But for a good long while, America’s military technology will be generations ahead of China’s.

The stealth fighter is a good case study. If China did in fact build its own stealth aircraft–without simply reverse-engineering a Russian design–then it’s a nice achievement. But the plane’s first flight, reported a couple weeks ago, comes more than 30 years after America’s stealth program began. During that time, the United States has developed numerous next-generation stealth technologies, established a detailed training regimen, built a global support infrastructure, and learned how to defeat stealth technology if an enemy should ever use it. Rather than sending a threatening message to the United States, China was probably showing off its advanced jet for more practical reasons–like advertising its wares to other countries that might want to buy Chinese-made weapons. And if China does decide to sink vast amounts of national wealth into the world’s costliest weapon systems, it could end up diverting resources away from worthier projects that might have a much bigger economic impact, as some critics feel America has done.

China is trying to modernize a military that not long ago was completely obsolete, and it does have modern missiles, submarines, and Russian-made aircraft that make it quite capable of defending itself. And there probably are still some Communist party hardliners who feel that waging a war to reclaim Taiwan would be worth the cost. Americans tend to think of China as a superpower wannabe always focused on Washington, but Michael Swaine of the Carnegie Endowment for International Peace points out that China shares land borders with 14 other countries and has a long history of territorial disputes with truculent neighbors. That makes regional dominance its first national-security priority. Plus, any war would torpedo the economic gains China has spent the last 30 years making. Still, if you’re really concerned about Chinese aggression, then worry about cyberwar, not bombs and bullets.

Our biggest enemy isn’t China. It’s ourselves. Critics tend to describe China as “taking” American jobs, as if a whole variety of industries rightfully belongs in the United States, in perpetuity. That’s not how capitalism works. Jobs always move from place to place, based on who can do the work most effectively at the lowest price. As low-paying jobs migrate away from the United States, it’s up to us to replace them with higher-paying jobs that require more skill and generate more innovative products. But that requires a strong education system, effective government policies, the careful use of national resources, citizens willing to sacrifice and work as hard as necessary, and above all, enlightened leadership. If we can’t muster that, it’s not China’s fault. It’s our own. And if China or any nation can do better, then maybe they deserve to be No. 1 after all.

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