China’s future in the coming decade

МОСКВА, 30 мая 2021, Институт РУССТРАТ.

Wang Tao, a senior economist of UBS investment bank, the largest financial holding company in Switzerland with equity capital of USD 52.9 bln and assets of USD 958.5 bln as of December 2018, in his article published by Caixin, expanded on reasons which allowed the Chinese economy to overcome the systemic crisis of capitalism with a GDP growth of 0.8–0.85% at the end of 2020, when all the others demonstrated a fall from 3-5 to 15-8%.

From 1985 to nearly 2016, export was the main source of China’s economic miracle. It happened due to a combination of three factors: the extremely low cost of the local labor force; low environmental requirements for industrial production; and almost free access to the rich domestic sales markets of the United States and Europe.

Between 1970 and 2019, the volume of Chinese exports in monetary terms increased 993-fold (from USD 2.7 to 2690.4 bln). For a period of 49 years, the volume of goods and services supplied abroad increased every year by 10.2% nationwide and by 13.8% per capita. If at the beginning of this period for every hundred dollars of world foreign trade only 70 cents were “Chinese”, then even taking into account the crisis recession, Beijing’s share amounted to already 34.8 dollars by the end of 2019.

The year before last, the results showed that the total export volume of the Celestial Empire outgrew the USA’s export by 1.9 times, Japan – by 3 times, South Korea – by 4.1 times,   India – by 5.2 times, Russia – by 5.6 times,  Vietnam – by 9,6 times, and Myanmar – by 124.3 times.

It is important to note that over the past fifty years the PRC has massively increased the total return of its foreign trade. If in 1970 its surplus fluctuated around USD 97 million or 0.11% of state GDP, then by 2019 it reached 38%. This explains the reason for a fundamental exacerbation of relations between China and the United States, which for almost a century has successfully appropriated its lion’s share from global trade profit.

In principle, there is nothing extraordinary in the export model of the economy. As of 2019, the share of exports in GDP was: 46.9% in Germany, 55.6% in Austria, 81.8% in Belgium, 65.1% in Belarus, 71.9% in Cyprus, 74.4% in the Czech Republic, 82.8% in Hungary, 83.3% in the Netherlands, 39% in Russia, 31.1% in the UK, 11.7% in the USA.

The PRC did not stand out from the rest but with one essential exception. China became the only country in the world which, from 2014-2015, made efforts to reduce the dependence of the national economy on exports, focusing on the expansion of the domestic consumer market. While in the first decade of this century, China’s GDP depended on foreign trade revenues by more than 35%, then at the end of 2019, the foreign trade accounted for only 17%, when 83% was brought by domestic demand.

Therefore, when the quarantine cut international commercial connections almost for a year, the leaders of the world economy faced an unrecoverable recession caused not only by border closures but also by the weak manageability of value chains from initial production to final sales. At the same time, the PRC leadership maintained its total control. Therefore, it follows from this that the Chinese leadership started working on the plan of national economy transition to a new long-term strategy in the period of 2014-2015.

Now this work has been already completed and tactically integrated into the operational plans of the 14th five-year program. Its implementation will not only fundamentally transform China itself, but will also drastically influence the global picture of the world.

Analysis of public sources about the Chinese five-year program, especially about 14th five-year plan (2021–2025), shows that the focus was shifted to the further development of a stable domestic market. The fact that 58% of China’s national GDP growth (USD 6.14 trln) was provided by domestic Chinese consumers in 2019 became the benchmark of the planning.

The plan is to strengthen this trend by the way of the decisive expansion of investment in domestic infrastructure and technology, public investment in household expenditure, an increase in the technology development rate and the volume of their installation into daily life. In all senses, from consumer grade, to the expansion of automatisation and robotisation of industrial production, as well as the large-scale implementation of everything that may be consolidated in the term “digital” (from communication and banking technologies to artificial intelligence). As a result, the country’s leadership expects doubling capacity of the PRC’s domestic market over the next five years.

It is important to note that the current level of the Chinese economy has been achieved by an increase in the urbanisation level from 9% to 58% over the past 49 years. It is commonly believed that the “Chinese miracle” success was based on a great amount of “cheap Chinese willing to work for a bowl of rice”. And it’s been like this for a long time. However, by the end of 2020, the average per capita GDP in PRC reached the $10,000 level and, as Western experts believe, the country will not be able to move further along this path. But in reality, the situation is rather different.

Currently, the population of the PRC is 1.4 bln people. About 90-110 million of them achieved “rich” status even by American or European standards, and 400 million rose up to “average income” and created the “middle class”, which now makes up the basis of the country’s national economy.

However, China still has a significant resource for further growth with roughly 600 million people living on an average of $3.8 per day, including more than $200 million living below the poverty rate of $1 per day. According to the plan of the 14 five-year program, the country is going to fundamentally raise their standard of living by promoting about 50-60 million people to the “middle class” every year.

Thus, the Chinese economy will be able to address two problems at the same time. First, reduce dependence on export revenues to about 5–6% of GDP. Second, to ensure stable economic growth of GDP at a rate of at least 4.2-4.5% over a long period by expanding the domestic demand of “new Chinese” (similarly to “new Russians”, or rather, because their income and consumption have reached the “middle class” level).

Thanks to this, by 2035 China has all the reasons to raise its GDP from the current $15 trln to 30 trln, regardless of the state of the foreign market and the demand level in the USA, Europe and any other region of the world market. At the same time, due to the inertia of processes, its foreign trade will also inevitably expand to approximately $6-7 trillion by 2035-2037.

This indicates a serious problem that Russia will inevitably face in about 2040-2050. Even today, Beijing has clearly indicated its desire to form its own closed autocratic political and economic cluster, based on which it will be able to implement the fundamental strategy of the “Chinese world order”, known as the “middle state”.

It involves the creation of a sphere of unconditional economic and political dominance of the PRC on the basis of the countries of Southeast Asia and the Asia-Pacific region. Its borders are outlined by the framework of the Regional Comprehensive Economic Partnership (RCEP), created on November 15, 2020, based on ASEAN countries, which means a special Chinese “free economic zone” covering 82% of the global industrial production and 34% of the global economy.

Leaning on the RCEP, and having the possibility of keeping out any serious competitors (either USA or EU government entities or Western transnational financial capital), China, in the future of the next 10-20 years, will be able to economically not depend on the rest of the world at all.

Not only in terms of the need for export profits, but also in the financial resources that are generally necessary for its economy to maintain high rates of scientific and technological progress, the superiority of which is the key basis for its long-term economic, political and social security. As well as providing sufficient opportunities to exert effective pressure on external competitors, if necessary.

Moreover, pressure should be understood not only as economic, but also as direct military instruments. The latter is especially important in the light of the fact that, as follows from the numerous statements made by the system analysts of the PRC, Beijing sees the future world of “universal prosperity” in a rather peculiar way.

It contains himself, as well as four other leading “centres of power”. One, sooner or later, will form around India. One, in one form or another, will take shape “in the space of the West.”

The options may vary. If the USA manages to annex the European Union, the “Western world” will form a fairly monolithic structure. Although with a very specific internal structure arising from the domination of transnational corporations over the official institution of a state. Otherwise, two roughly equal players will appear in the “western space” – the United States and the European Union.

The third force, in one form or another, will be represented by Africa. According to leading Chinese experts, it will have to unite on the basis of its own unique cultural identity, which differs fundamentally from all others.

In a similar way, the Arab world will evolve into something isolated in which, no matter how strange it may sound, Israel will be included. There is only one drawback in this plan. Russia has no any significant place in it.

Conclusions

The US establishment understands very well the point of current trends. In coming years by the middle of this century, the USA will inevitably face a significant increase in the economic power of the PRC, against which it will not only lose its leading place, but may even slip behind by 4-5 places in the global ranking, or even not enter the “top five” at all.

If China reaches a GDP of $30 trln, and up to $40-45 trln in the RCEP framework, then the United States, with its current $21 trln and with its maximum of $28 trln by 2025-2030, will not even be able to compete on equal terms and even will find themselves losers.

But if the United States manages to economically and politically annex the European Union (total GDP of $16 trln), South America (about $6 trln) and some part of the rest of the world, for example, Africa and the Middle East, then it will collect up to $50-55 trln. This will allow them to impose tough competition on China, in which America believes itself capable of winning, then to achieve stable geopolitical parity for the long term, at least until the 90s of the 21st century.

In this scenario, Russia may become the “last prize” which can decisively shift the balance in favour of one of the parties. According to the above-mentioned expert of UBS investment bank, following present day trends Moscow has all chance to reach the GDP of USD 4.5-5 trln.

When they are included in the “western cluster” it exceeds 60 trln, which gives reason to expect to lock onto itself the Turkish economy and all those economies that are now oriented towards the Russian Federation. And as a result, an economic supply up to 70 trln, which significantly supports the Western establishment in its confidence that victory over China in the second half of this century is quite possible. This explains the growth of American (and, more broadly, Western) pressure on Russia in order to deprive it of its political and, in the future, economic identity.

On the other hand, maintenance of friendly relations with Russia at the current stage provides China with two key advantages. First, “while the Americans are trying to crush the Russians”, Russia acts as an effective lightning rod for a significant part of the threats to China. That is precisely why Beijing expands warm relations with the Russian Federation, but at the same time it does not formalise it in the form of official agreements especially military ones. On the contrary, it is careful to distance as a “separate third force standing above the battle”.

Secondly, Moscow’s disinterest in the excessive strengthening of the “West” (especially America) creates the proximity of its geopolitical interests with Beijing, thereby, albeit indirectly, transferring to the PRC the protective properties of the Russian strategic nuclear umbrella.

Институт международных политических и экономических стратегий Русстрат

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