Wednesday, July 07, 2021

When Will China Rule the World? Maybe Never



Eric Zhu and Tom Orlik - Mon, July 5, 2021, 5:00 PM

Few questions are more consequential, whether it’s for executives wondering where long-term profits will come from, investors weighing the dollar’s status as global reserve currency, or generals strategizing over geopolitical flashpoints.

Over the long haul, three factors determine an economy’s growth rate. The first is the size of the workforce. The second is the capital stock—everything from factories to transport infrastructure to communication networks. Finally there’s productivity, or how effectively those first two can be combined.

In each of these areas, China faces an uncertain future.

By 2050, Bloomberg Economics projects China’s productivity will have caught up to 70% of the U.S. level—putting it in the typical range for countries at a comparable level of development.

Global ties are starting to fray. A recent Pew survey found 76% of Americans had an unfavorable opinion of China—a record high. They aren’t alone. The blame game over the origins of Covid, mounting concern about human rights in Xinjiang, and Hong Kong’s draconian National Security Law have all helped to darken the global view of China’s rise.

If ties with the U.S. and its allies continue to fray, the cross-border flow of ideas and innovations that has done so much to accelerate China’s rise will start to dry up. Beijing is already getting a sneak peak at what that might look like. Europe is backing away from a major investment agreement, and India closing the door to Chinese technology.

A combination of stalling domestic reforms and international isolation could bring another extreme scenario into play: financial crisis.