For too long, Americans have been suffering under the myth that China is the invincible super-power of the twenty-first-century and it will surpass the U.S. in wealth and influence in a matter of just a few years. Nothing could be further from the truth.
It is true that China is the world’s second largest economy with the largest population and an impressive record of growth over the last twenty years. Several hundred million people have been lifted from poverty to a lower middle-class existence, which is a world historical achievement. So far, so good.
The problem is that much of this growth has been the result of investment that is a complete waste. Empty ghost cities and unnecessarily huge and elaborate transportation infrastructure is both non-sustainable and offers no future returns. Worse yet is that much of this investment was financed with debt that can never be repaid. The cheap train tickets offered on the high-speed train from Shanghai to Beijing will never pay for projects such as the Nanjing South train station along the way.
Other features of the Chinese growth story include cronyism, corruption, bribery and extreme income inequality. China lost over $1 trillion in hard currency reserves in 2016 as it tried and failed to defend the value of its currency against the dollar. And, despite the several hundred million whose lives have improved, about 700 million still live close to absolute poverty in the countryside.
Now, China’s growth is slowing down as supreme leader Xi Jinping tries to rein in excess borrowing and wasteful investment. Xi was recently appointed leader-for-life, but his tenure is already unraveling as slowing growth, bad debt and corruption create popular discontent. This article by leading economist Steve Hanke describes the challenges facing Xi as China goes through this transition.
The Chinese growth story is impressive, but any comparison to the U.S. is both premature and likely not to be realized for a very long time, if ever.
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