China's Economy Is Not Overtaking America's

Michael Beckley, "China's Economy Is Not Overtaking America's,"Journal Of Applied Corporate Finance, May 18, 2020, https://www.aei.org/research-products/journal-publication/chinas-economy-is-not-overtaking-americas/

"...China’s economic growth over the past three decades has been spectacular, even miraculous. Yet the veneer of double-digit growth rates has masked gaping liabilities that limit China’s ability to close the wealth gap with the United States. China has achieved high growth at high costs, and now the costs are rising while growth is slowing. As I explain in a recent book, data that accounts for these costs reveal thatthe United States is several times wealthier than China, and the gap appears to be growing by trillions of dollars every year.1 This conclusion may surprise many people, given that China has a bigger GDP, a higher investment rate, larger trade flows, and a higher economic growth rate than the United States. How can China outproduce, outinvest, and outtrade the United States—and own nearly $1.2 trillion in U.S. debt—yet still have substantially less wealth?....The reason is that China’s economy is big but inefficient. It produces vast output but at enormous expense. Chinese businesses suffer from chronically high production costs, and China’s 1.4 billion people impose substantial welfare and security burdens. The United States, by contrast, is big and efficient. American businesses are among the most productive in the world; and with four times fewer people than China, the United States has much lower welfare and security costs. GDP and other standard measures of economic heft ignore these costs and create the false impression that China is overtaking the United States economically. In reality, China’s economy is barely keeping pace as the burden of propping up loss-making companies and feeding, policing, protecting, and cleaning up after one-fifth of humanity erodes China’s stocks of wealth.....China’s productivity growth has not only been unspectacular; it has been virtually nonexistent.5 By contrast, productivity improvements have accounted for roughly 20% of U.S. economic growth over the past decade, as it has for most of the past 100 years.6...China’s private sector is relatively efficient, but it is shackled to a bloated state sector that destroys nearly as much value as it creates.11... All told, more than one-third of China’s industrial capacity goes to waste and nearly two-thirds of China’s infrastructure projects cost more to build than they will ever generate in economic returns.12 Total losses from this waste are difficult to calculate, but the Chinese government estimates that it blew nearly $7 trillion on “ineffective investment” between 2009 and 2014.13...As just one example, China’s unused capacity in steelmaking exceeds the total combined steel production capacity of Japan, the United States, and Germany.10....The unsurprising result of all these burdens, plus the wasted investment highlighted above, has been a dramatic rise in China’s debt, from 100% of GDP in the 1990s to greater than 300% in 2019.19.... With a per capita income six times greater than China’s, the United States not only has more surplus wealth to pay down its debts it also has much lower interest rates....China’s household and corporate borrowers have been hit with rising interest rates that now consume 20% of China’s GDP.21 Roughly a quarter of China’s thousand biggest firms owe more money in interest than they earn in gross profits; and 45% of all new loans in China are being used to pay interest on old loans, a practice that analysts are calling “Ponzi finance.” Writing off these bad loans will cost China somewhere between $1.5 trillion and $10 trillion, with the latter figure nearly equal to China’s GDP.22 To put that number in context, consider that the United States spent 8% of its GDP writing off bad loans after the 2008 financial crisis.23.....Ultimately, the only way for China to solve its debt problem without gutting social spending is to increase its productivity, which in turn will require innovation. The Chinese government understands this well. Since 2007, it has tripled R&D spending, employed more scientists and engineers than any other country, and mounted the most extensive corporate espionage campaign in history......These moves, however, have yet to turn China into an innovation powerhouse. China produces only half the high-technology output and highly-cited scientific studies as the United States, holds five times fewer international patents, and pays more royalties for technology than it takes in.24...China is a major player in high-technology supply chains, but Chinese firms mainly focus on low-tech activities...For those reasons, Deloitte and Boston Consulting Group both argue that the United States increasingly rivals China as the world’s most cost-competitive manufacturing nation.33....China now leads the world in retractions of scientific studies due to fraud, one-third of Chinese scientists have admitted to plagiarizing or falsifying results (versus 2% of U.S. scientists), and nearly two-thirds of China’s R&D spending has been lost to corruption.35/////This culture of fraud extends throughout China’s economy.....According to the World Bank and the UN, human capital—the knowledge, skills, and labor embodied in a nation’s population—constitutes more than half of the wealth of most countries. Both organizations estimate that the U.S. stock of human capital is several times greater than China’s.38 China has four times the population of the United States, but the average American worker generates seven times the output of the average Chinese worker.39....China also loses 400,000 of its most highly educated workers every year to foreign countries in net terms, including thousands of scientists, engineers, and “inventors” (people that have registered at least one patent).52The United States, by contrast, nets one million workers annually from all foreign countries, including roughly 20,000 inventors and 15,000 scientists and engineers, 5,000 of whom come from China.....The U.S. workforce is not only better educated but also healthier than China’s. China loses 40% more years of productive life per capita on average from major ailments.53....China is aging more rapidly than any society in history. The number of Chinese aged 65 and older will more than triple by midcentury, from 130 million in 2015 to 400 million by 2050.63 Meanwhile China’s workforce will shrink by 212 million—about one-third of the current total. At that point, senior citizens will account for more than 30% of China’s population versus only 20% of the U.S. population.....The United States can feed its population with only 1% of its workforce in agriculture whereas China devotes 30% of its workforce to farming—and still depends on food imports to feed its population.64....Roughly one-third of China’s provinces and two-thirds of its major cities suffer from extreme water scarcity.67....The United States generates more than three times as much wealth from each gallon of water as China.68....The United States generates roughly 40% more wealth per unit of energy than China.76....American farmers produce 30% more food per hectare than Chinese farmers.....China must recognize that its economic engine is not strong enough to support grand ambitions for territorial conquest and regional hegemony. Its best option, therefore, is to become a responsible stakeholder in the existing international order. The United States, on the other hand, must recognize that China is nowhere close to dominating East Asia, let alone challenging the United States for global primacy. And so Instead of preparing for preventive war, the United States should reinforce the existing East Asian balance of power...."