Recent Charts

Importing Chinese Tourists as Exports

Australia has been exporting large quantities of resources to China in recent years. I would like to say it has transformed our economy, but in reality it has accentuated pre-existing attributes of the Australian economy. Indeed, although the policy framework shaping Australia's economic interactions has been transformed, Australia remains reliant on resources to pay our way in the world.

In the 1980s, Japanese demand for resources was followed by a significant increase in Japanese investment and tourists. This is now happening with China and the prospects for further increases in Chinese tourism are high. 

Our importing of Chinese nationals to visit Australia is registered in the national accounts as an export as is the spending of Chinese students. 

Alan Kohler canvasses the potential numbers:

In June about five Boeing 747 loads of seasonally adjusted Chinese tourists arrived in Australia every day. For the year to June, the total was 769,000 -- a record number -- and second only to New Zealanders. More importantly, Chinese tourists stay the longest and spend by far the most: $5.1 billion in the year to March, according to Tourism Australia data, or $7,343 each -- double what the Kiwis spend. 

Apparently only 5 per cent of Chinese actually own a passport so there is a fair bit of upside potential there, although it's important to note that most Chinese are still poor. Despite China's rapidly growing economy over recent years, overall China is still a poor country, ranking 82nd in the world for Gross National Income per Capita (measured in US dollars) according to the World Bank. This puts it just above Namibia, but below Iraq and Turkmenistan. Australia ranks third.

In the case of tourism, purchasing power parity rankings of economic weight (see here for explanation) have less purchase than exchange rate measures (local currencies converted to US Dollars) because going overseas requires you to convert your money and pay higher prices. I'm not sure that poor Chinese will be visiting expensive rich countries any time soon.  Of course, with a population as large as China's, this is not really the point as long as the middle class keeps expanding and decides to spend some of its new found wealth on coming to Australia.

According to The Economist: 

Nearly one in ten international tourists worldwide is now Chinese, with 97.3m outward-bound journeys from the country last year, of which around half were for leisure. Chinese tourists spend most in total ($129 billion in 2013, followed by Americans at $86 billion) and per tax-free transaction ($1,130 compared with $494 by Russians). More than 80% say that shopping is vital to their plans, compared with 56% of Middle Eastern tourists and 48% of Russians. They are expected to buy more luxury goods next year while abroad than tourists from all other countries combined.

Supposedly, the number of Chinese tourists will double by 2010 and their spending will triple, although there is no indication how these numbers were arrived at. It's China so anything I suppose is possible.

Tourism Australia reports that there were "6.6 million visitor arrivals for year ending June 2014, an increase of 7.9 per cent relative to the previous year". China ranked second behind New Zealand with the UNited Kingdom third.

The Australian Bureau of Statistics compares 2013-14 with 2003-04 to see how short-term visitor arrivals have changed. Seemingly, the Japanese are less interested than they once were in Australia.

New Zealand numbers have increased by over 30 per cent, but the number of Japanese visits has fallen from 718,600 to 323,700, a fall of 55 per cent. Chinese visits have increased by nearly 230 per cent, while Indian visits have increased by nearly 250 per cent.

It is not just short-term visitor numbers that interest Australian authorities. In recent years, Australia has introduced 'significant investor visas', which enable people to buy their way into Australia. According to a recent report, the scheme "has reaped a total $1.7 billion to date", awarding 343 residency visas as at the end July 31. The Abbott government accelerated the scheme after concerns that the program begun in 2012 was not attracting investors. Accordingly "six hundred and two additional applications had been made at July 31, and $3.05 billion in investment pledged in return

Australia has been in a good location to take advantage of Asia's booming economy, although we should be careful about assuming that these numbers will continue to expand, just because Japan and China have large populations. Australia will continue to depend on the economic growth of East Asian countries with China increasingly important for all countries in the region. A slowing China will affect all other countries in Asia and in turn have a negative affect on Australia.   

Middleweight to Heavyweight? The Growing Importance of Asia in the World Economy

Asia's rise has been Australia's economic gain. The rise of Japan, followed by South Korea and Taiwan, Singapore, Malaysia, Thailand and other non-communist countries of Southeast Asia had provided significant export markets for Australian commodities, though not a sustained structural increase in their value. Then along came China, changing everything. Not only did rapid Chinese demand increase the prices Australia received for its exports, but also Chinese manufacturing production helped to decrease the price of Australian imports. Manufactured goods made (or assembled) in China became significantly cheaper. Chinese competitive pressures also helped to keep in check the prices manufacturers throughout the world could charge for their goods.

Currently there are several narratives about Australia’s economic future. The first is an acceptance of Australia’s role as a resource exporter built on the back of long-term Asian demand and a high exchange rate. Alongside this story is one about a growing Asian middle class, which will be increasingly receptive to utilising Australian services. This view means that there will be an alternative market for Australian exports after the Asian giants become less resource intensive economies as they progress up the income ladder.

All of these positive narratives are based on a projection that Asia's remarkable rise over the past half century will continue over the next half. The possibility that Asia may not continue its rapid economic rise is largely dismissed as a narrative, although the likelihood that Asia will become conflict-ridden is common in international relations, foreign policy and security studies.

To understand where Asia might be headed we need to fathom how far it has come since the end of World War II.

This post shows that if current GDP trends were to continue, even at a moderated pace, Asia will become the world's most important economic region and China the world's largest economy. Emerging market and developing economies have overtaken the advanced economies on a purchasing power parity basis. The major component of this GDP convergence has been the rise of developing Asia, particularly China. Asian GDP (both developed and developing) is now approaching the GDP of the European Union and the United States combined.

Economically, a continuation of present trends would provide amazing opportunities for Australia, although politically it might heighten concerns amongst Australians about the implications of Western and American relative decline.

The Great (Re)convergence

The rise of developing Asia has been a major component of the so-called rise of the rest, which has led to the reversal of the great divergence between the advanced and developing economies that began with the industrial revolution. The great convergence is profoundly reshaping the world economy. Given that the world economy on the eve of the industrial revolution was dominated by Asia - particularly China and India we should perhaps consider the current period as the great reconvergence.

Gregory Clark in A Farewell to Alms outlines the Malthusian world (from the Stone Age to 1800), which he argues exhibited “a counterintuitive logic” where:

anything that raised the death rate schedule –war, disorder, disease, poor sanitary practices, or abandoning breast feeding – increased material living standards. Anything that reduced the death rate schedule – advances in medical technology, better personal hygiene, improved public sanitation, public provision for harvest failures, peace and order – reduced material living standards. 

In other words, vice equalled virtue and virtue equalled vice. Even gradual improvements in technology increased population and therefore did not lead to lasting increases in living standards. Hobbes, Clark contends, was wrong; man was better off in his natural state. 

The Industrial Revolution, whose most remarkable feature is the “all-pervading rise in incomes per person”, changed all that and led to a remarkable divergence between rich and poor countries. The gap between the living standards of the rich and poor countries grew from 3-4:1 before 1800 to 40-50:1 in the late twentieth century.

World Economic History

Source: Clark

The commercial revolution from the late fifteenth century shows that global economic weight is not necessarily an indication of global power. Asia's dominance of the world economy until the early nineteenth century could not stop it from being overrun by European colonial powers from the sixteenth century. Economic dominance was overcome by military superiority. 

Gross economic weight is clearly not everything, but there can be no doubt that economic relativities are changing, which provides the possibility that the West's period of dominance is coming to an end. 

Growth in Asia since the 1960s has been nothing short of remarkable. Economic success, however, was far from universal. Until the late 1980s, authoritarian capitalist states and authoritarian communist states divided Asia. Countries under US tutelage embraced an authoritarian form of capitalism with a strong developmental ethos. The success of capitalist economic development provided a stark contrast to the failures of the socialist centrally planned development model. 

China attempted to collectivise and control economic development from the centre, Vietnam struggled with war and its aftermath, and India fostered autarkic import substitution policies that led to stunted growth. Even before the end of the Cold War, the Communist and insular states realised that shifts in economic direction were vital if they were going to replicate the high growth rates of capitalist Asia. China began its long march to capitalist dynamism in 1978 and Vietnam switched economic direction in the mid-1980s. 

By the early 1990s, Japan appeared to be set to overtake the US economy, but unfortunately the 1990s were a decade of stagnation after the excessive property and stock market boom of the late 1980s. In the late 1990s, the region suffered a severe financial crisis which threatened to derail Asia’s rise, but by the early 2000s it was clear that the crisis was only a temporary set back on Asia’s phenomenal economic rise. 

From the mid-1990s, China became the major economic story in the region because of its sustained high growth rates. China's continuing growth during the economic crisis that began in 2007 cemented Asia's place as the centre of world economic dynamism. Growing regional production networks initially developed by Japan in the 1980s, followed by South Korea, Taiwan, Singapore and Hong Kong and now centred on the Chinese economy have reinforced Asian dynamism. Despite assertions about decoupling, final goods demand from outside the region still matters for Asian growth. 

In recent years, many analysts have argued that India will join China as a major Asian success story. Developing Asia has been joined by other emerging economies to transform the world economy since the 1980s. The countries of Eastern Europe, Brazil and South Africa have led to the great reconvergence. 

Emerging market and developing economies now account for over 50 per cent of the world economy on a PPP basis, surpassing the total weight of the developed economies. This is a remarkable change from 1990 when the emerging market and developing countries accounted for a little over 30 per cent. Since 1990 emerging and developing economies have been on an ever-upward trajectory, with the global crisis beginning in 2007 thus far affecting mainly the United States and Europe.

All Graphs

Gross Domestic Product (Purchasing-Power-Parity)
Share of World Total
Percent

Source: IMF World Economic Outlook (see here for definitions of country groups)

The bulk of the increase in the emerging and developing country share has been accounted for by developing Asian economies, particularly China. 

The Asian economies combined - both developed and developing - are approaching the economic weight of the European Union and United States combined. Given projected relative growth rates Asia should overtake the EU and US in the near future. The EU and the US combined has declined from 55.8 per cent of the total in 1980 to 37.4 per cent in 2013.  

The rising economic weight of Asia has mainly been a result of rapid growth in China, although India and the ASEAN 5 have also contributed. China's increased weight has been at the expense of Japan. (Developed Asia includes Japan, South Korea, Singapore, Taiwan and Hong Kong)

Comparing the top 5 plus the EU we can clearly see the significant changes to relative weights since the early 1990s. These trends have been strengthened since the global crisis. The advanced capitalist countries have lost ground to China and India.

The Future

Ideas about an Asian ascendancy are not new. US President, Theodore Roosevelt, writing in 1903 argued that: “The Atlantic era is now at the height of its development and must soon exhaust the resources at its command. The Pacific era, destined to be the greatest of all, is just at its dawn.” (Yahuda) War and the dilemmas of decolonisation made Roosevelt’s prediction premature, but the post-war world has seen Asia rise to the world’s most dynamic economic region. The general assumption today is that the Asian ascendancy will continue, even if the breakneck speed of growth moderates in coming years. 

In 1994, Paul Krugman compared the growth of the newly industrialising countries of Asia to Soviet growth in the 1950s and 1960s, a period when it appeared that the Soviets were on the brink of challenging the United States economically as well as militarily. He argued that ‘perspiration not inspiration’ had been the major factor. He saw Japan, however, as different: 

Japan, unlike the East Asian “tigers”, seems to have grown both through high rates of input growth and through high rates of efficiency growth. Today’s fast-growth economies are nowhere near converging on US efficiency levels, but Japan is staging an unmistakable technological catch-up. 

Krugman argued that while Japan was experiencing an unmistakable ‘growth slowdown’, he underestimated the extent to which Japan would stagnate over the rest of the 1990s and early 2000s. If Japan had continued to grow at the rates achieved over the period, 1963–73, he predicted it would have overtaken ‘the United States in real per capita income by 1985, and total Japanese output would have exceeded that of the United States by 1998!’. Krugman also noted the differences of the Chinese growth story to that of the Asian tigers. Significantly, he pointed out that, ‘its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels’. By the early 1990s, it was clear that China’s shift in direction was leading to rapid and sustained economic growth. 

The Japanese story should at least alert us to the dangers of the belief that the recent past and the present provide clear guides to the future. While the Asian challenge to Western dominance will probably be the issue of the twenty-first century, we should be wary of substituting a possible future for the present. Asia still has a long way to go and many hurdles to negotiate before its global economic influence matches its growing economic weight. 

The contemporary structure of the world 'political' economy has been shaped by the advanced economies, particularly the United States. This liberal economic order has 'allowed' the rise of developing countries, who are now demanding a larger say in global economic institutions such as the World Trade Organisation. 

But domestic political developments could be just as important. Over the next generation, how the advanced countries deal with challenges to their economic supremacy and counter the negative domestic consequences of globalisation will shape the future trajectory of the world political economy. 

Protectionist responses to relative decline and growing inequality in developed economies would be damaging in an integrated and thus interdependent world economy.Global and regional production structures would exacerbate the impact of protectionist responses, although their existence could also make any shifts toward protectionism more costly and therefore less likely. Whatever the case, the ability of the developed world to influence structure remains paramount. An ironic, if unlikely, turn away from globalisation in the advanced economies would negatively affect export-oriented economies disproportionately.  

Asia's ability to avoid conflict.will also be paramount for a continuation of current trends. Asia’s current situation is unprecedented. Three major powers – China, Japan and India, together with the United States – will shape the future of the region. Australia has alliances with two of the powers, is an important contributor to China's economic rise and has much to offer India as well. Australia stands to benefit greatly from continued economic expansion in Asia and to lose enormously if economic crisis, political instability or environmental catastrophe override economic development. 

Australia has a role to play in helping to establish the regional institutions and diplomatic environment for peaceful relationships. Bilateral relationships will also be very important. But much of the action will take place regardless of our wishes. Australia needs to prepare for the possibility of conflict and economic downturn, while working and hoping for the best. If peaceful development continues, Australia will be fortunate to be geographically adjacent to the world’s most dynamic economic region. Australia’s prosperity is now dependent on continuing Asian economic growth. What happens in Europe and North America still matters for Australia, but nothing matters to us more than Asia. 

Notes

IMF definitions 

Advanced economies
Composed of 35 countries: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.

Major advanced economies (G7)
Composed of 7 countries: Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

Other advanced economies (Advanced economies excluding G7 and euro area)
Composed of 14 countries: Australia, Czech Republic, Denmark, Hong Kong SAR, Iceland, Israel, Korea, New Zealand, Norway, San Marino, Singapore, Sweden, Switzerland, and Taiwan Province of China.

European Union
Composed of 27 countries: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Romania, and United Kingdom.

Emerging market and developing economies
Composed of 153 countries: Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, The Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Democratic Republic of the Congo, Republic of Congo, Costa Rica, Côte d'Ivoire, Croatia, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Eritrea, Ethiopia, Fiji, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo, Kuwait, Kyrgyz Republic, Lao P.D.R., Latvia, Lebanon, Lesotho, Liberia, Libya, Lithuania, FYR Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, Niger, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russia, Rwanda, Samoa, São Tomé and Príncipe, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Solomon Islands, South Africa, South Sudan, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sudan, Suriname, Swaziland, Syria, Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Tuvalu, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

Developing Asia
Composed of 28 countries: Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R., Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Tuvalu, Vanuatu, and Vietnam.

ASEAN-5
Composed of 5 countries: Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

My definition of Total Asia includes Developing Asia plus Japan, Korea, Taiwan, Hong Kong and Singapore. 

New Readings for Power in East Asia 2016GIR

Japanese lessons for China
http://www.macrobusiness.com.au/2013/07/japans-lessons-for-china/

The trans-Atlantic trade deal as a response to the shift of power to the East
http://www.nytimes.com/2013/07/28/opinion/sunday/want-world-domination-size-matters.html?pagewanted=2&tntemail0=y&_r=0&emc=edit_tnt_20130728&pagewanted=all

The US shift to Asia
http://thediplomat.com/2013/07/23/wheels-up-has-obama-really-pivoted-to-asia/

The hard side of soft power
http://thediplomat.com/the-editor/2013/07/24/the-hard-side-of-soft-power/ 

Japan
http://thediplomat.com/the-editor/2013/07/22/abe-the-internationalist/ 

The coming slowdown of the Chinese economy
http://thediplomat.com/2013/07/22/how-much-slowdown-can-beijing-tolerate/

Chinese self containment?
http://thediplomat.com/flashpoints-blog/2013/07/29/chinas-folly-of-self-containment/ 

US containment of China
http://thediplomat.com/flashpoints-blog/2013/07/30/us-is-encircling-china-with-fighter-jets-and-stealth-bombers/

China as a maritime power?
http://thediplomat.com/flashpoints-blog/2013/08/01/alfred-thayer-mahan-with-chinese-characteristics/ 

Should Russia be a focus of this course
http://thediplomat.com/2013/07/25/as-tensions-with-west-rise-moscow-looks-to-asia/

Rsing Chinese military power in perspective
http://thediplomat.com/flashpoints-blog/2013/08/05/keeping-chinas-second-aircraft-carrier-in-perspective/







 

China's Demographic Challenge

From the Financial Times

China's demographic structure has been a benefit for growth hitherto but will soon turn into a burden.

As Michael Pettis points out in his newsletter:

The one-child policy imposed at the end of the 1970s changed the subsequent age structure of the Chinese population quite dramatically and, as a side effect, created a kind of demographic boom for China. Over the next three decades, as the huge population of baby boom children matured and joined the labor force, and a relatively small number of workingmen and women grew old and retired, China’s working population grew much more quickly than the overall population. The number of working-age Chinese grew, if my memory serves, by between 1.5% and 2% a year on average since the late 1970s.

Because so few children were born after the late 1970s, this surge in the working population was associated with a huge improvement in China’s dependency ratio. A declining number of non-working-age Chinese could be supported by a rising number of working-age Chinese. 

The demographic dividend caused by the one-child policy is now of course creating a worsening dependency ratio as a declining number of workers supports a longer-living number of old people.

 

China Compared

I finally got around to reading the World Bank's tome on China, called China 2030: Building a Modern Harmonious, and Creative Society. I thought I'd share a couple of charts that I'm going to use in the lecture on China in my course Power in East Asia. 



Here's another one I'm going to use from the MacroBusiness blog - well worth a look if you haven't seen it already.

Europe, China, the United States: What Balance and Whose Payments?

It might be a little bit dorky, but one of my favourite times of the month is the arrival of Michael Pettis's newsletter China Financial Markets. This rather blandly titled missive always provides rational, well argued and interesting comment on the Chinese economy.

Pettis constantly rails against those who don't understand the basic accounting concepts of the balance of payments.

In October last year in relation to the possibility that China could help with Europe's debt problems, he argued that:

Europe does not need capital from foreigners. It is capital rich. In fact it is even a net exporter of capital. The reason certain European governments cannot borrow is not because Europe is capital poor. It is because these countries are perceived to be insolvent, and in altogether too many cases they almost certainly are. 

Bailing out an insolvent government cannot help it. It will give it time to work out its problems, many argue, but the historical precedents suggest that the quicker an insolvent country acknowledges its insolvency and demands debt forgiveness, the better off it is in the longer term. 

... an increase in foreign money inflows actually will make Europe’s problems worse. Europe needs more demand, not more foreign money. More foreign demand is the opposite of more foreign money.

Remember that a net increase in foreign capital means that foreigners are importing demand from Europe. But Europe needs them to export demand to Europe. More foreign capital inflows is exactly the wrong thing – and in fact what Europe really needs is to increase its exports of capital. Paul Krugman, by the way, makes almost exactly the same point when he says: “It is very difficult in real time to convince people that capital inflows pose a threat, no matter how obvious the numbers seem." 

But difficult or not, it is important that policymakers grasp this point and it is important that investors understand the consequence when policymakers fail to grasp it. The trade and currency wars that we are experiencing are nothing more than wars about exporting capital. Exporting capital is exactly the same as importing demand. Every country that wants to run a trade surplus is also by definition a country that wants to export capital. 

And of course every country that accepts net foreign capital inflows must also accept a trade deficit (or, more correctly, a current account deficit). This isn’t a theory. It is an accounting identity.

This sort of reasoning is counter-intuitive to many people. Some of my more knowledgeable students look incredulously when I argue that the United States would actually benefit from a decline in Chinese purchases of US Treasury securities because it is popular wisdom that China holds all the power now that the US is so indebted to Chinese borrowers.

For what its worth, I've always thought that the fact that China lends to the United States at low rates of interest (i.e. bonds) and then uses some of that money to invest to earn higher rates of interest in China was a good deal for the United States and an indicator of Chinese weakness rather than strength. The only problem with this view is that the increased liquidity created by Chinese purchases of US dollar assets was an important factor in the global and US financial crisis. But as Pettis makes clear, Chinese investment in the United States does provide an advantage for China in that it exports capital to and therefore imports demand from the United States. To be blunt, the balance of power in this situation is far from clear.

Pettis has repeatedly pointed out that many people fail to understand this balance of payments logic in regards to the US-China relationship.From his October 31st 2011 newsletter he writes:

Non-economists may think China, with its huge reserves and 9% GDP growth can weather a trade war more effectively than the US. For example in an otherwise interesting article in the South China Morning Post, Lanxin Xiang, a professor of international history and politics in Geneva, says the following:

China owns too many US government bonds and yet the central bankers have always discouraged the government from entertaining any thought of using them as diplomatic leverage in dealing with Washington. But throughout modern world history, using monetary instruments to achieve diplomatic aims is the norm rather than exception. One notable case was the Suez Canal crisis, when Washington threatened to stop market support for sterling to force the British withdrawal from the Anglo-French colonial expedition against Egypt's nationalist president Gamal Nasser. 

I believe Xiang has used the Suez Canal crisis argument before, and it is a very clumsy analogy. The UK desperately needed to import capital from the US in those days to support sterling, whereas today the US is eager to get China to stop exporting capital (there is, remember, no difference between intervening to weaken a currency and exporting capital, and Washington clearly wants China to reduce its intervention). It isn’t likely that a threat by the US to stop exporting capital in the former case is as credible as a threat by China to stop exporting capital in the latter case, but of course this is the kind of mistake that many who don’t understand central banking or the balance of payments mechanism make over and over again.

In fact most economists (economic historians and trade economists, anyway) know that trade wars usually switch demand from surplus countries to deficit countries. Instead of hurting the deficit countries, this actually causes faster growth in the latter, albeit at the expense of slower growth in the former. Trade and currency war, in other words, is bad for the world but not necessarily bad for the deficit countries.  

The thing to note here is that Chinese capital outflows involve the export of demand from the United States and therefore an increase in unemployment in the United States. An orderly fix of the global imbalances (see here for a 2010 discussion) will be required if the world is to avoid an eventual trade war. This means adjustments on both sides of the question, but if China continues to pursue an investment and export-led growth model its current account surpluses must be matched somewhere with current account deficits. The United States has been this major deficit country.

In Europe, Germany's surpluses have been matched by Spain's deficits. Australia also is a major deficit country, although our current account deficit has declined as domestic saving has increased and non-mining investment has moderated.

Pettis makes the point that China's lending to the United States is not a discretionary decision, instead it is a fundamental consequence of its growth model. From his January 8th 2012 newsletter he writes:

Chinese “lending” to the US government is not a discretionary decision that they can choose or not choose to do – it is the automatic consequence of a growth model that requires a trade surplus to absorb domestic overcapacity – the idea that the US government needs foreign funding is based on a very fundamental misunderstanding of the balance of payments.　 The US government does not need foreign buyers for its bonds. On the contrary, it is in Washington’s best interest that foreign central banks sharply reduce their purchases of USG bonds.

He also highlights the need to make distinctions between 'deficits':

foreigners do not fund fiscal deficits. They fund current account deficits, and as an accounting requirement the size of the current account deficit is exactly equal to the net foreign funding. Capital account inflows must exactly match current account outflows. 

The direction of causality can go either way. If investment in the US is so high, for example, that it is impossible for US savings to supply the full demand (as occurred during much of the 19th Century), then the US must import foreign capital to make up the shortfall. The difference between domestic US investment and domestic US savings, of course, is equal to the net amount of foreign savings imported into the US, and is also equal to the US current account deficit. In this case soaring US investment causes the US to have a current account deficit and leads foreigners to fund this excess investment.

This has some relevance to Australia because we have historically had an excess of investment over saving meaning that we generally run a current account deficit. This is not necessarily a bad thing if the investment is productive. That's a big 'if' and much of the foreign capital inflow into Australia involved household borrowing to buy (and, to a lesser extent, to build) houses, thus bidding up the prices of houses. This game has seemingly finished for the moment at least, partly because the household sector has such high levels of debt at around 150 per cent of disposable income (down from 160 per cent a few years ago).

Note that Pettis makes the point that the direction of causality between saving and investment and between capital exports and imports are not always clear cut. 

But the direction of causality can also run the opposite way. Suppose foreign central banks have decided for domestic reasons (for example in order to generate domestic employment) to accumulate hoards of US government obligations and so run a trade surplus. This will cause a surge of net capital inflow into the US. In that case the US must run a current account deficit equal to the net inflow.

There are several ways this can happen. One way is for the surge in foreign capital inflows to cause a sharp rise in what otherwise would have been unnecessary or unfunded investment – the real estate bubbles in Spain and the US might be obvious examples of this. Another way is for foreign savings to displace domestic savings, perhaps by funding a credit-fueled consumption boom.

But whether for good reasons or bad reasons there is no escaping the fact that net capital imports into the US, whether pulled by domestic needs or pushed by foreign needs, must be accompanied by a rising US current account deficit – this is just arithmetic. ...

Remember that saying that the US needs more foreigners to buy US government bonds in order to keep interest rates low is exactly the same as saying the US needs a bigger current account deficit in order to keep interest rates low. This cannot be true.

In a recent newsletter (20 March 2012) Pettis makes some astute observations about China and the way that many commentators assume that the Chinese leadership can fulfil their intentions. He argues that this is because they focus on intentions rather than constraints.

This failure to focus on constraints rather than intentions is why I think most analysts have gotten China wrong in the past five years. By misunderstanding how China’s growth model works, and how the functioning of the model forces certain kinds of behavior and prevents others, they have been much less skeptical about Beijing’s ability to execute its intentions than they should have been. I think we should be much less impressed by what the leaders say they will do, and much more concerned about how the constraints they face will limit what they actually can do.

This applies not just to China, but for any country and particularly Europe right now:

This is an issue not just for China, by the way, but for any country. For example, knowing the constraints imposed by the functioning of the balance of payments I am wholly unimpressed by what many senior German and European leaders say they expect to happen in Europe. The fact is that if we hope to see net repayments by peripheral Europe to Germany, we will also have to see a reversal in their respective current account positions, and so far this seems unlikely. Without the latter, however, the former is impossible, no matter how determined Madrid, Rome, Berlin and Paris might be to reduce debt in an orderly way.

So what are the economic options available to the Chinese leadership given both internal and external constraints?

Pettis argues that two initial assumptions are necessary.

The first is that the fundamental imbalance in China is the very low GDP share of consumption. This low GDP share of consumption, I have always argued, reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, among others, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth.

The consequence of this is that investment levels must be kept very high. The question is how much investment can the Chinese government continue to make beyond the historically highest levels for any country ever!

According to Pettis this has "resulted in massive over investment and an unsustainable increase in debt. China cannot slow the growth in debt and resolve its internal economic problems without raising the consumption share of GDP."

Pettis's second assumption is that some sort of rebalancing in China is inevitable because its imbalances "cannot get much greater".

The first reason is the debt dynamics. Every country that has followed a consumption-repressing investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led either to a debt crisis or to a “lost decade” of very low growth.

At some point the debt burden itself poses a limit to the continuation of the growth model and forces rebalancing towards a higher consumption share of GDP. How? When debt capacity limits are reached, investment must drop because it can no longer be funded quickly enough to generate growth. When this happens China will automatically rebalance, but it will rebalance through a collapse in GDP growth, which might even go negative, resulting in a rising share of consumption only because consumption does not drop as quickly as GDP.

Pettis quickly points out that he is not suggesting a sudden China collapse, rather he is suggesting that re-balancing must occur eventually either in an orderly or disorderly fashion. It is debt that will eventually force China to re-balance.

Now it is at this point that some students ask me (the good ones I mean) why can't China use the huge amount of reserves it has to pay off its internal debts?

Once again the explanation requires some knowledge of the balance of payments and reserve banking - not every politics student's favourite topics! Instead of making an already complicated post even more complicated, I've provided an explanation here.

The real question about rebalancing is not that it will happen but when. Betting against China or assuming that its growth model is doomed once again reminds me of Keynes's reputed observation about the ability of markets to remain irrational for longer than individuals can remain solvent. Lots of scholars and investors have assumed and bet that China was destined to fail, but it ain't happened yet. Pettis canvasses the more positive arguments:

China bulls continue to argue that there isn’t yet a significant overinvestment problem in China, which implies that debt is not rising at an unsustainable pace, or if it is, that it can continue rising for many more years before the debt burden itself becomes unsustainable.

This also implies that the consumption imbalance is temporary and can resolve itself gradually and over time as the benefits of earlier investment begin to emerge and eventually overwhelm the total costs of those investments. Of course if this is true China does not need a surging current account surplus because if investment isn’t being wasted it can keep investment rising faster than savings for many more years. The current account surplus, remember, is just the excess of savings over investment. 

The key vulnerability of my argument, then, is whether or not you think investment in the aggregate is being misallocated in China and has been for many years. If you agree, then you must also agree that consumption must become a greater share of GDP over the next five to ten years. What’s more, you should also agree that the only way to increase the consumption share of GDP is to increase the household income (or wealth) share of GDP.

China, in other words, must stop transferring income from households to the state and in fact must reverse those transfers. As Chinese household income and wealth become a greater share of the overall economy, so will Chinese consumption. As I see it, the various ways in which this transfer can take place can all be accounted for by one or more of the five following options:

1.Beijing can slowly reverse the transfers, for example by gradually raising real interest rates, the foreign exchange value of the currency, and wages, or by lowering income and consumption taxes.

2.Beijing can quickly reverse the transfers in the same way. 

3.Beijing can directly transfer wealth from the state sector to the private sector by privatizing assets and using the proceeds directly or indirectly to boost household wealth. 

4.Beijing can transfer wealth from the state sector to the private sector by absorbing private sector debt. 

5.Beijing can cut investment sharply, resulting in a collapse in growth, but it can mitigate the employment impact of this collapse by hiring unemployed workers for various make-work programs and paying their salaries out of state resources.

Notice that all of these options effectively have China doing the same thing: In each case the state share of GDP is reduced and the household share is increased. There are however very big differences in how the changes are distributed among various parts of the household sector and the state sector. 

Different rebalancing scenarios have very different implications for growth and distribution. For Pettis, the real costs of rebalancing must fall on the state sector.

Remember that for the past twenty years, and especially in the past ten years, the state and business share of a rapidly growing economic pie was also growing, which meant extraordinary growth in the value of assets controlled by the state sector. The household share of the growing economic pie of course contracted, but the rapid growth in the pie ensured that households nonetheless saw their income grow quite rapidly even as their share of total income declined.

When we reverse this process, as we must if there is to be rebalancing, any slowdown in GDP growth will be minimally felt by the household sector (if the rebalancing is managed in an orderly way), but even a scenario of very high GDP growth must result in much slower growth in the value of state sector income and assets. Of course if GDP growth actually slows sharply, which I expect it will, the growth in the value of state sector assets will collapse and perhaps even turn negative. 

In my opinion this change in the growth rate of the state sector will be at the heart of the political economy choices, and difficulties, that Beijing will be forced to address in the nest few years. It is likely to be much easier to keep political leaders happy when the value of the state sector is growing comfortably in the double-digit range than it is when it is growing in low single digits, or even contracting.

The issue then, according to Minxin Pei, is whether the CCP will be 'happy' to let this happen. Pettis discusses economic constraints, whilst Pei talks about political constraints. Pettis goes through the positives and negatives of all the options outlined above:

As I see it these are ultimately the only options – or at least the major set of options – Beijing can choose to follow over the next few years if it wants to avoid a debt crisis. Of course Beijing doesn’t have to choose only one of the above options. What is more likely in fact is that policymakers end up choosing a combination. 

For example we can posit the following. Beijing can choose an intermediate path between the first and second options, and raise interest rates sharply over the next two or three years while also raising the value of the RMB by 10-15% in an overnight maxi-revaluation. 

In order to protect workers from the resulting surge in unemployment, Beijing can instruct state-owned companies and local governments temporarily to hire a huge number of workers for make-work programs (the fifth option) and initially pay for this by increasing borrowing (the fourth option). At the same time it can begin a massive program of privatization, which should include transferring ownership of land to peasants, and selling off assets and using the proceeds to shore up the social safety net and to pay down debt in the banking system. 

This would certainly work economically to rebalance China in a way that guarantees fairly high growth rates over the rest of the decade, but is it politically possible? Here I would defer to Minxin Pei, who might argue that the scale of privatization required is not possible politically. In that case China would end up being forced into rebalancing via the fourth option, with a long-term surge in government debt. 

And this is my point. If you believe my assumptions are correct, then you should agree that China has no choice but to follow one or more of these paths. If privatization is not an option, then a collapse in the economy caused by a rapid adjustment in interest rates and the currency (the second option) might be. If that is ruled out, then perhaps the outcome will be a surge in government debt (the fourth option again), and so on. 

This what I mean by the economic constraints that limit the choices Beijing can make. It doesn’t matter what anyone thinks or wants Beijing to do, if the plan violates the economic constraints, it cannot be done. To be really complete we should outline the political constraints, the environmental constraints, the demographic constraints, the external trade constraints, and so on, although of course this is way beyond my ability, but each of these exercises allows us to escape from the confusion of stated intentions and to focus on the possible.

Interesting times ahead. 

The Indian and Chinese Diasporas

From The Economist:

The major question is what is the significance of these external communities for the future development of their economies and international relations? 1.3 million Chinese in Peru?

The Asian Century

If globalisation was the buzz concept of the 1990s and terrorism the focus of much of the early 2000s, the rise of China has been the dominant issue since the latter part of the 2000s. The focus of the 2010s has broadened to include the rise of India as well.

But as I've written many times in this blog, the Asian century is unlikely to be smooth, linear process. Expect the unexpected. China and India are large economies with lots of people, but largeness is no guarantee of continuing success as some writers appear to suggest. Michael Wesley, for example, argues in a recent article in The Australian's Literary Review that:

Unlike the Asian tigers, the two giants' success has nothing to do with the quality or singlemindedness of their reforms. It has everything to do with their size. It's a question of multiplication. Even a moderately positive policy measure will have a big effect if it releases the productivity of hundreds of millions. Even a minor gain in productivity will have global effects when multiplied by hundreds of millions. To be bigger than Europe or the US, China and India need to be only one quarter as productive per person and they are closing fast.... Even as the aggregate size of the giants' economies surpass those of developed countries, they will
remain poor societies. This means that even when they are huge, these economies will still contain within them plenty of individual-level energy that will stimulate further strong economic growth.

Wesley argues that size provides a wider margin for error:

The size of the giants means that they can afford to be less concerned about the effects of corruption, crumbling infrastructure and slothful bureaucracies on international investment. India's poor governance, bad infrastructure and high corruption are estimated to wipe nearly 2 per cent off its annual economic growth rate, and still it grows at 8.5 per cent.  The World Bank estimates that governance failures suppress foreign direct investment to China by 30 per cent, yet it remains the world's largest destination for FDI. Their countries' size has also given the giants' governments greater latitude to experiment with reforms through trial and error, without risking the performance of the whole economy.

Taken literally, Wesley's large-ism means that policy doesn't really matter that much although he does mention the importance of key early liberalising reforms. But if size were everything then why were China and India so stagnant for such a long period of time after decolonisation in India and the victory of the communists in China? It was policy that put these countries on the path to development, not size; although once liberalising policies were enacted size has mattered in the way that Wesley argues.But it is also policy that will help to maintain their success. As I've noted before, there is a delicious irony in the fact that economically liberal policy-makers and commentators have so much faith in the wisdom and prowess of the Chinese Communist Party!

The most important question about the future is whether China and India will continue to rise and the general consensus appears to be that they will. While Wesley hedges his bets on this question, the article assumes that rise is more likely than decline.

Whatever happens to them in the decades ahead, the rise of China and India will profoundly reshape the world of the 21st century. If they continue to grow at about their present rates the global economy will re-centre on them. Even if they suddenly stop growing at these rates and lapse back to their preboom momentum, they will continue to be important economies whose consumption still drags the global economy this way and that. If their detractors are right, and they are headed for a serious economic and social meltdown, the fallout from their collapse will define the rest of the century.

All of this holds irrespective of what happens in the rest of the world. The US may be headed for a renewed spurt of innovation-led growth, similar to what happened in the early 90s. Europe may find new sources of dynamism. Japan may too. But none of this will change the fact China and India have arrived as significant shapers of how the world works, and their preferences, enthusiasms and allergies will affect the choices other societies face. The tidal effects of the growth rates of the Asian giants reach further, faster and deeper in an increasingly globalised world. Emerging economies -- particularly very large ones -- are almost always more volatile than established ones, making their fate much more central to the fortunes of the global economy than their absolute economic size would suggest. Their scale and rate of change within an increasingly seamless global economy enables, displaces and reshapes economic activity and its social and political consequences far beyond Asia. For example, at their present rates of growth, China and India are adding more than 40 million workers to the global economy annually, the equivalent of the arrival of a France in the world economy every year.

While Wesley outlines the extensive geo-strategic and geo-economic consequences of Asia's rise, he is pessimistic about Australia's Asian future because he believes Australians are too complacent about the need for change:

Australia did very well out of the rise of Asia even though Australia didn't change, as it was repeatedly advised to. Australians kept their alliance with the US and their marked comfort with Western values and societies over Asian societies. Lowy Institute polling has consistently shown Australians overwhelmingly support the alliance with the US. They consistently feel more warmly towards Western countries -- New Zealand, Canada, France, Britain and the US -- than Asian countries. And those Asian countries they prefer are the most Westernised: Singapore and Japan. ...

He also worries about the lack of popular focus on Asia and about the inexperience of Gillard and Abbott on the diplomatic front. I'm not really sure how one would properly measure societal insularity, but my gut feeling is that we're probably less insular than we were in the past. Still it is not surprising that Australians feel more comfortable with Western values because we are a Western country. Nor is it surprising that they think that keeping the US Alliance is a good thing, having a good relationship with the world's most powerful country is a no-brainer.

Nevertheless, more effort could be made to increase educational opportunities about international developments and Asian studies. But how should this be done.

Those arguing for more funding for Asia literacy often infer that the problem is one of supply, that the government should supply more Asian education. In my experience at Griffith University, the problem has been more a problem of demand. The university has continued to support Asian Studies, but not many students want to do it. The demand is for International Relations, not for Asian Studies. I think that this is an understandable and reasonable position for students to take in a globalising world.

For many students that I come into contact with area studies are seen as too limiting. So simply increasing the number of Asian language programs or increasing the number of Asian social science courses will not make the difference that many assume. The much more difficult question is how to increase student demand for things Asian. Griffith for example has an IR undergraduate program that is intensively Asia focused (as well as an Asian studies degree). It also has an Asia-focused Master of IR and an excellent research institute called the Griffith Asia Institute. Sadly I don't have a solution for weak demand for Asia literacy, but it can't start at the university level.
 
In his post-Budget speech, Wayne Swan also muses about the rise of Asia and its consequences for Australia. While he shares Wesley's contention about the continuing and ineluctable rise of Asia, he is much more optimistic about Australia's future:

The speed and scale of the changes we are witnessing in Asia are unprecedented. Twenty years ago China and India together accounted for less than one tenth of world production. Today that share has doubled, and by the end of this decade it is expected to be over a quarter of world production. China and India will then account for more output than the US and Japan combined. By then it will be apparent that Asia has not only become the world’s biggest production zone, but also its biggest consumption zone.

So, concerned as we were by the overhang of the financial crisis, the floods, cyclones and earthquakes – we knew when we put the Budget together that our prospects were still bright and our economy would not be knocked off its long-term path.

Helped by strong demand from Asia we have seen a truly stunning rise in the prices for our commodity exports. Right now, our terms of trade are their highest sustained level in 140 years.
The huge global demand for our resources is also driving an investment boom the likes of which this country has never seen. ...

We are familiar with Asia’s role in driving our mining boom. Less understood are the opportunities for the broader Australian economy from the expansion of the Asian market for goods and services as income, wealth and living standards rise in the region.

One of the key points we make in Budget Statement Four, and what I want to stress to you today, is that in many ways the mining boom is just the first taste for us of the huge shift in the world’s economic centre of gravity in Australia’s favour.

As well as generating huge demand for our energy and mineral resources, sustained rapid growth in Asia is delivering hundreds of millions of people into a burgeoning Asian middle class. By 2020 there is expected to be more middle class consumers in Asia than in the rest of the world combined.  The implications for high-value knowledge economies like Australia stretch well beyond the mining boom. ...

Australia has always been at its best when embracing the forces of change rather than resisting them. We began 200 years ago with wool for the English market, and we extended over the following century into gold, meat and dairy. By World War I we were extending into manufactures, a trend that became even more pronounced during and after World War II.
Then we had the mining boom of the 1960s, the increasing exports of coal and iron ore and bauxite. At first gradually and then with greater speed we diversified our exports away from the UK to Japan and China and emerging Asia. We began to export more of our manufactures, and our services.

It is a mistake to think of Australia as an agricultural economy last century, although our farming sector made a huge contribution. Today it’s an oversimplification to think we’re just a resources economy, or that the time of our manufacturers has passed. Our manufacturers have innovated and moved with the times – and they will continue to do so, even in the face of the mining boom.
But the story that lies behind our economic development is the gradual rise of service industries in Australia. There are more than four times as many Australians in professional, scientific and technical services than there are in mining. There are four times as many in education and training as there in mining.

I make these points to you today because I want to remind you that while mining has rarely been more important to the Australian economy than it is today, most of us make out living in creating and delivering services. This is why the vast shift of world production, consumption and wealth into the region of which we are a part is so important to our future.

Not only for the opportunity to sell our coal and iron, our ore and gas and our other mining products, as important as these exports are. Not only for the opportunity to sell our wheat and wool and meat, as important as those exports are. Not only for the opportunity to sell our manufactures. But also for the chance to continue to transform our economy into one which increasingly exports services. ...

Now the point I want to make to you about this future for Australia is that our success in the Asian Century, in the mining boom and beyond, will rely more on education and training than anything, and that depends heavily on investment by governments.

 

China's Global Ambitions

For students of 2016IBA and others:

See

For China, Will Money Bring Power?


By PIERS BRENDON

Published: August 21, 2010

This article captures in a nutshell many of the important themes of the course!!
 
Brendon reports that:

As the media have breathlessly reported, China has just overtaken Japan as the world’s second largest economy, and bids fair to knock the United States from the top spot within 20 years. Ever since Deng Xiaoping embarked on his “second revolution” in 1978, introducing free market reforms and opening up to the outside world, China’s economy has grown by almost 10 percent a year — one of the most sustained expansions in history.  ...

The crucial question is: how will China use its new-found wealth?

The traditional answer is that rich countries tend to equip themselves with the sinews of war in order to enhance their position at the expense of rivals. According to the dominant economic philosophy of the 18th century — mercantilism — wealth and power are interchangeable, each helping in the acquisition of the other.

Thus Britain used its economic predominance after the Industrial Revolution to establish global hegemony. Protected by the fleet, its multiplying colonies supplied the mother country with raw materials and bought her manufactured goods. But by 1914 Germany was easily out-producing Britain, and Kaiser Wilhelm’s challenge to the Royal Navy’s supremacy did much to precipitate the First World War.

However, history does offer alternative answers — and the case of America is particularly pertinent. The economy of the United States overtook that of Britain in the 1870s, and by 1914 it was nearly three times as large. A small island making steam engines by hand inevitably fell behind a bountiful continent that mass-produced motor cars on assembly lines.

Brendon's expertise on the British Empire. The major question is whether China's rise will be more like Germany's or the United States' challenge to Great Britain.

It also seemed inevitable that the United States, particularly under the internationalist leadership of Presidents William McKinley and Theodore Roosevelt, would mount its own challenge to the British Empire by translating its economic strength into military might. Uncle Sam did arm, of course, during the conflict with Spain and World War I, creating an outstanding Navy.

But for the most part, the nation’s business was business. In the 1890s it was suggested that the State Department should close down because it had so little to do. And during the isolationist period between the two world wars, when at its peak America was responsible for nearly 40 percent of the world’s manufacturing output, the United States Army was around the 17th-largest on the planet.

In other words, the military of the world’s richest nation amounted to hardly more than a border constabulary armed with obsolete equipment like 1903 Springfield rifles. During the Depression, cash was so tight that its best officer, a bald-headed major named Dwight D. Eisenhower, had to make a requisition for his streetcar fare between the War Department building and the Capitol.

Needless to say, Axis aggression transformed the United States into a military-industrial colossus. It so galvanized a depressed economy that the historian Niall Ferguson of Harvard has been moved to dwell on “the benefits of militarism.”

Brendon then canvasses the liberal view that peace promotes prosperity and vice versa - opposed to the realist (mercantilist) idea about power and plenty.

Market forces act in the moral world, said the 19th-century British politician Richard Cobden, like “the principle of gravitation in the universe — drawing men together and thrusting aside the antagonism of race, and creed, and language.” Certainly this is an ideal to which China has at least paid lip service since the end of the cold war, asserting that globalization fosters international cooperation.

Recall that at the start of the new millennium, a consensus existed among China-watchers that the Red Menace was as much of a mare’s-nest as the Yellow Peril. Like the United States before Pearl Harbor, China would concentrate on butter not guns, harmonizing its interests with those of its competitors through the peaceful mechanism of the open market. There was much talk of an entente between China and Japan, even of a Chinese-American alliance to maintain stability, fight poverty, tackle global warming and so on.

No doubt much of this was wishful thinking. Indeed, such soft soap may well have been part of a charm offensive by China, culminating in the Beijing Olympics of 2008, designed to mask the true character of a monstrous tyranny that was made manifest on Tiananmen Square in 1989.

Whatever the truth, informed opinion is now divided about Chinese intentions. Some pundits maintain that the fundamental assumption of China’s leaders is that conflict is part of the human condition, the only way of resolving differences in a perilous world. A recent comprehensive survey of Chinese authors revealed that most anticipate a repeat of the “warring states era in Chinese history.” Is not hostility toward “foreign barbarians” China’s default state?

There are, at any rate, obvious signs that the awakened dragon is flexing its muscles. China’s defense budget rose to be the second highest in the world in 2008, and its naval (particularly submarine) buildup has, in the opinion of the American journalist Robert D. Kaplan, caused “the loss of the Pacific Ocean as an American lake.” In search of markets and natural resources, China is expanding its influence aggressively in Asia, the Middle East, Africa and South America.

On the other hand, China’s 6.6 percent share of global expenditure on arms is dwarfed by America’s 46.5 percent. And, like the United States during and after the reconstruction era, modern China is preoccupied by the problems associated with rapid growth: pollution, corruption, rural poverty, urban overcrowding and troubled labor relations.Above all, its leaders have to keep the lid on the simmering political and ethnic cauldron, while at the same time preventing the economic bubble from bursting — as Japan’s did.

China may well keep its promise, for the moment at least, to follow the path of peaceful development. We can’t know, of course. But doom-merchants predicting that China will topple America from its pre-eminence should recognize that history is not necessarily on their side.