The widespread belief that the 21st century belongs to China will turn out to be another of history’s great failed assumptions unless radical changes are made to that nation’s profound structural and demographic challenges.
With the U.S. embroiled in economic turmoil, three decades of unprecedented economic growth behind it, a seemingly endless supply of cheap labour and bulging foreign currency exchange reserves due to massive trade surpluses, Chinese growth does indeed appear unstoppable. Even the world’s largest bank by market capitalization is now Chinese. Yet it is the image of the “flawless” girl lip-synching her way through the opening of the Beijing Olympics while the real singer was set aside due to her chubby cheeks and less than perfect teeth that offers insight into the challenges ahead.
Remember that 20 years ago, the same experts predicting China’s inevitable coronation were forecasting that Japan would dominate the world financially. At that time, Japan housed some of the world’s most highly valued corporations, including the most expensive financial institutions. Its future also seemed inevitable. But the Japanese forgot the most pedestrian of all economic realities: if you are not prepared to reproduce, you guarantee your extinction. Its low birthrate now means that, according to its own statistics, Japan will lose 70 per cent of its workforce by mid-century, and already its share of the world economy has dropped from a high of 18% in 1994 to below 10% in 2008.
Back to the next “sure thing”. China’s economy, like ours, is similar to any individual business or family unit in that it is simply the sum of the spiritual and mental qualities of its people. China’s output of value will only be as strong as, and can never rise above, the overall values of its society. History has taught us unambiguously that without strong and widespread moral standards, such as honesty, trust, self-respect, integrity, and loyalty, a society and its culture will degenerate over time. A society with weak values will not produce much value; a nation whose values are declining will experience a declining economy. Ultimately, spiritual and metaphysical ingredients, not physical or political assets, are the most vital to the long-term economic progress and prosperity of a people. And the ultimate barometer of a culture’s values is how it treats its next generation.
China is facing severe demographic challenges that remarkably seem to have escaped the scrutiny of economists who are responsible for most of the 100-year growth forecasts fuelling commonly-held assumptions about China’s inevitable dominance. The country faces the most dramatic aging of a population that the world has ever seen. Given its current low levels of wealth, this will make 100-year forecasts of hockey stick-like growth trends appear ludicrous.
More troublesome is a growing gender imbalance: there are at least 113 males in China for every 100 females below the age of 15. Some studies suggest this imbalance is closer to 150 males to every 100 females for the second child in families that have two children. Regardless, the impact will cause family—and therefore economic—structures to collapse, and poses serious questions about the sustainability of a society in which females are treated as second-class citizens or, worse, as disposable assets with less “commodity value” than males.
The challenges go further. If China is to sustain its growth, it will need to expand private property ownership, though it may not be willing to take such a step. It will also need to open its economic system further and accept a more modest role for government in order to create the freedoms required for its expanding middle class to flourish, beginning with religious freedom.
China needs significant reforms to its legal and accounting systems, which today are far too arbitrary, though it is likely to resist such changes. The rule of law and the integrity of financial reports are fundamental for success and must include the protection of copyrights and patents, the enforcement of contracts, and the consistent punishment of crime. Yet, China remains notorious for theft of intellectual property and its deceit in rewarding a privileged few. There is little doubt among accounting professionals that financial reporting in China is far from accurate, and as we have recently found out in North America, truth in numbers matters. It matters a great deal.
China has and will continue to have a major impact on the world’s economy. But without significant systemic changes, and despite Wall Street’s woes, it is more likely to slide on to the Japanese highway of lost promise than it is to continue accelerating down the road to overtaking America as the world’s superpower.
