China Is Now #2 ... So Now What?

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If you weren't hibernating recently, you probably saw that China surpassed Japan to become the #2 economy in the world. Many smart people have already weighed in on China having passed this psychological threshold (see here, here, and here). Consensus opinion seems to boil down to "not so fast, let's put this development in context." As someone who follows China daily, I tend to be partial to that view as well. In fact, this "milestone" came and went with a whimper for me. Barring utter catastrophe, it was always a matter of when, not if, China would become #2--and most economists were expecting some time this year. And yes, it will probably eventually exceed the United States in total output. I've seen one projection from a Chinese official that puts the Chinese economy at RMB105 trillion yuan in 2030 (hypothetically assuming the RMB appreciates to a level of 3:1 against the dollar by then, that would put the Chinese economy at about $35 trillion, about 2.5 times current US GDP). 


Yet this fait accompli is a mixed blessing for China. And I could've predicted their official response. To illustrate, the ever dependable China Daily supplies a graphical answer: 
damienma.jpg
The focus on per capita GDP (in case you miss it, it's highlighted in red!)--that's roughly on par with Albania for those curious--is a typical Chinese response. Of course it's not very useful to compare Albania to China from an economic perspective, but you get the point and the Chinese government's argument. Beijing's reaction to this news, then, may be one of reluctant embrace or even worse. In fact, the story vanished from China Daily's homepage quickly. This is a similar defense that China uses on issues ranging from energy consumption to carbon emissions--it's the per capita figure that really matters, and don't forget we're a developing country, not OECD! That line of defense worked better when China was perceived as relatively poor, but a significant perceptual shift has occurred, and being #2 simply reinforces that shift. This makes it that much more difficult for Beijing to convince the world with its "developing country" line of reasoning. Yes, yes, China will still have 1 billion relatively poor people even if it has 300 million relatively wealthy and middle-class. To most others, however, 300 million is the size of the entire US. 

That is truly the heart of China's conundrum. It is simultaneously extremely poor and ostentatiously rich, depending on the evidence that's selected for emphasis. Which country will China put forward to face the future? It is afraid of assuming outsized responsibility that comes with greater power, or what I call the "Spider Man complex" ("with great power comes great responsibility, Peter"). And just as Spider Man, China too gripes about being misunderstood and occasionally being cast as a villain rather than a hero (ok, that's enough indulgence of comic book analogies).  

An economic juggernaut China will continue to be, but it also seems clear that its economic performance of the last three decades will be much tougher to replicate without pursuing a set of structural changes to the economy. There's no inevitable trajectory for China, but it has time and again harnessed crises and sufficiently identified turning points to rejuvenate the economy. Without rehashing what many have written at length about China's challenges, I think it's worth to pose what I think are some of the questions that China will have to answer as #2: 

Domestically:

1. Can China manage to transform itself from a producer-oriented economy to one driven more by organic, domestic consumption--or what economists call "rebalancing"? If not, would it just muddle through and eventually become a Japan that's beset by a dose of complacency, as Fallows recently found by returning to his former suburban home outside of Tokyo. 
      
2. Can China address the energy, environmental, and social/demographic burdens that are necessary to propel growth? Much of this could hinge on what China has in store for the next five-year plan through 2015. Some of the Chinese commentariat have repeatedly invoked FDR's New Deal in arguing for the kind of social policies that are necessary to sustain China's growth and heal social cleavages. 

3. Will China actually practice what its leaders preach on relying more on qualitative, rather than quantitative, growth? 

Externally:

1. Will China offer a more compelling answer to what kind of power it intends to become? 

2. How will China handle the collective external pressures--from climate change to participation in international institutions and provision of public goods--that will almost certainly grow in intensity because it is #2? 

3. How will China reconcile the mismatch in outside perceptions of it and what it feels it is realistically capable of?    

I think we'd all like some definitive answers to those questions. If you've got some, let me know. 
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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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