1. China will quickly overtake the United States as the world’s most powerful economy.
According to a November poll by the Pew Research Center, 44 percent of Americans believe that China is already the world’s top economic power, while 27 percent put the United States in that position. That perception is completely at odds with the facts. This year, China’s economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world’s second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy and well behind the European Union, if taken as a whole.
2. China’s vast holdings of U.S. Treasury bonds mean it can hold Washington hostage in economic negotiations.
China has the biggest holdings of U.S. Treasury bonds of any country – around $1 trillion. Many people think this means China is “America’s banker” and that, like a bank, it can withdraw its line of credit by selling off its Treasuries whenever Washington does something Chinese leaders don’t like.
But China’s Treasury holdings are not like regular loans that a bank extends to a company. They are more like deposits: safe, liquid and carrying a very low interest rate. Like a depositor, China has little ability to tell its bank how to run its business. It can only vote with its feet, by taking its deposits elsewhere – but its deposits are so huge, there is no other “bank” in the world that can take them. The European and Japanese bond markets are not big enough to absorb that much Chinese cash, nor can China buy enough oil fields, ore mines or real estate to soak up its money. And it can’t simply invest all its dollars at home, because doing so could lead to rampant inflation. So like it or not, Washington and Beijing are stuck with each other – and neither has the power to hold the other hostage.
5. China’s economy has grown mainly through the cruel exploitation of cheap labor.
Every time a developing economy starts growing fast, richer countries accuse it of “cheating” by keeping its wages and exchange rate artificially low. But this isn’t cheating; it’s a natural stage of development that comes to an end in every country, as it will in China. China has grown in much the same way as other economies we now view as mature and responsible success stories – including Japan, South Korea and Taiwan. Those nations invested heavily in infrastructure and education, and quickly moved their workers from low-productivity jobs in rural areas to more productive jobs in cities. When rural labor was abundant, wages were low, but they rose rapidly after those surplus workers joined the urban labor force.
China is hitting that spot now: The number of young people of workforce entry age (15 to 24) is projected to fall by one-third over the next 12 years. With young workers more scarce, wages have nowhere to go but up. This is already happening: Last month, Guangdong province (China’s main export hub) raised its minimum wage by 20 percent.
China still has plenty of workers moving from the countryside to the cities, but the age of ultra-cheap Chinese labor will soon be gone.