Wednesday, August 26, 2015

Economy: Will China Never Be As Rich As America?

(Drivebycuriosity) - China bashing is en vogue. There are so many negative headlines about the country. The claims that  "China will never be as rich as America" (theweek). I have a serious problem with the use of the word "never". It has to do with "infinity" and in an infinite time anything can happen. I agree with James Bond: "Never Say Never Again".

The question is: Can China catch up to the US in a reasonable time? The author denies. He claims that "odds are against China ever becoming a rich nation by U.S., European, or Japanese standards". He asserts that just one "new country", South Korea, managed to catch up to Western standards. I know a second one: Singapore (driveby).

Here some calculations: Today China has $7,500 income per capita, the US number is  $54,600 (worldbank). Today China`s economy grows about 7% annually, the US grows around 2%. If China continues today´s growth rate, the country needs around 29 years to reach today´s US income (I used this interest calculator  interest). If the US continues growing with a yearly rate of 2%, the American per capita income would climb in this time to $96,961. In order to catch fully up China needs 41 years (if both countries keep today`s growth rates of 7% versus 2%). In this case China´s per capita income will climb to $120,100 , the American per capita income would reach $122,970. This is just financial mathematics.

I am aware that 7% growth over 41 years is very challenging. Here a less ambitious calculation: China`s newborn can expect to live 75 years (wikipedia). In the lifespan of an average newborn Chinese (70 years),  the country needs  2.9% growth annually to reach today´s US income (I used again the interest calculator). In this time the US income should rise to $218,300 (if the US growth rate stays at 2%). In order to catch up fully China needs to grow 4.9% annually.

                                                  Growth Factor Human Capital

 It is clear: As long as China continues to grow significantly faster than the US, the catching-up process will continue and the income differences will shrink - fully or not. China  is still in the begin of a secular catching-up process which is fueled by extreme income & wealth differences to the US and other Western nation values. China doesn`t have much commodities but there is a  huge amount of human capital: 1.3 billion people who are intelligent, the Chinese work hard and save money to achieve a better life.  Wikipedia counted in 2014 already "2,236 colleges and universities, with over 20 million students enrolled in mainland China" (wikipedia). This fast growing knowledge will drive science & innovations in the future. The success stories of Hong Kong and Singapore (with a large Chinese population) show what is possible.

Yes, China has still a communist government but there a lot of capitalist segments like stock markets, special economic zones and many private companies (bloomberg). The differences to the US system (where banks & industries are regulated and airports, harbors, railroads, subways and more are still public) are shrinking.

The huge country is rapidly transforming into a consumer economy like the U.S. and other modern countries. Many peasants are moving to the huge metropolitan centers (megacities) which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, driving consumer spending. China is pumping trillions into airports, railroads and other infrastructure, the country has already some of the fastest trains of the world. In 2013 Beijing started major reforms which include softening the one-child policy & encouraging migration to bigger cities (with a higher productivity. China´s catch up process and growth should be boosted by the technological progress and advances of Internet, automatization of industrial production and 3D-printing. These developments raise efficiency and productivity of China´s economy as success stories like Alibaba and Baidu demonstrate.

"Never Say Never Again".

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