China is now the richest nation globally, stated Bloomberg (1).
As per the report, the global wealth tripled over the past two decades, quoting McKinsey, with China leading the way and replacing the United States for the top stop worldwide.
World’s New Wealth
As per McKinsey (2), which examined the national balance sheets of ten nations representing over 60% global income, China made up almost one-third of profits in worldwide net worth over the last two decades.
“We are now wealthier than we have ever been,” stated Jan Mischke, a partner at the McKinsey Global Institute, Zurich.
Notably, the world’s net worth increased to 514 trillion USD in 2020 from 156 trillion USD in 2000, as per the study. China made for almost one-third of the rise. Its wealth skyrocketed to 120 trillion USD from merely 7 trillion USD in 2020, a year before it joined the WTO, World Trade Organization, speeding its economic climb.
Where is the Wealth?
The United States, which is held back by muted increases in property prices, witnessed its net world double over the period to 90 trillion USD.
In both nations, the world’s most prominent economies, over two-thirds of the wealth is held by the richest 10%, and their share has been rising, stated the report.
As calculated by McKinsey, 68% of the net worth worldwide is stored in real estate. To a much lesser extent, the balance is held in things like infrastructure, machinery, and so-called intangibles such as patents and intellectual properties.
Even though the housing boom has been the key driver behind the global wealth surges, it has its side effects.
Side Effects
Over the last twenty years, the dramatic rise in net worth has outstripped the increase in global gross domestic product. And it has been ignited by rising property prices pumped up by dropping interest rates, states McKinsey. It also found that asset prices are over 50% above their long-term average relative to the income.
And it raises several questions about the sustainability of the wealth boom.
Rising real-estate values can make homeownership unaffordable for many people and increase the risk of a financial crisis. Yes, something similar to what had hit the United States in 2008 after the housing bubble burst.
And China can potentially run into similar trouble over the debt of property developers like the Evergrande Group. (Suggested Reading: Evergrande Crisis: The Chinese Infrastructure Giant is Set to Collapse)
The ideal resolution would be for global wealth to find its way into more productive investments that expand worldwide GDP, stated the report. The worst scenario would be a collapse in asset prices that could wipe out as much as one-third of the wealth worldwide, bringing it more in line with world income.
So, does it mean China will soon rule the world? Well, hold your horses. We believe that it may be difficult for China to sustain itself.
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China as No 1
Three factors determine an economic growth rate:
- The size of the workforce
- The capital stock -everything from factories to transportation to communication
- Overall productivity
And available data suggests that China has an uncertain future in each of these areas (3).
China has a Shrinking Population
The math is straightforward when it comes to the workforce. More workers mean more growth, whereas fewer workers mean less growth. And that’s where lies the first challenge for China.
China’s working-age population has already peaked with low fertility because of its one-child policy (4). Even though China has now made amendments, if fertility remains low, its population will shrink by over 260 million USD in the upcoming decades, a 28% drop.
As mentioned, China has been aware of the risks for a long time, even changing its course. It relaxed control over fertility.
In 2016, it raised the limit to two children, and this year, the government allowed three children (5). Meanwhile, there are also plans to increase the retirement age to keep workers in their jobs longer.
However, if these reforms succeed, it will be challenging for China to offset the impact of the demographic drag. And they may not succeed.
For instance, rules are not the only thing that holds families back from having more children. There is also the high cost of things such as education and housing.
The Capital Spending is Already Overdone
While no one expects to see the number of factory robots, railroads, or 5G towers shrink in China, after years of breakneck growth in investments, there are plenty of signs that it is now bringing diminishing returns.
Consider overcapacity in the industry, six-lane highways snaking into sparsely populated farmland, and ghost towns of empty buildings; they all illustrate the issue.
And with the labor force set to shrink and the capital spending already overdone, productivity holds the key for China to sustain its top position.
And according to most Western economists, China needs to take actions like the hukou system (6), which ties workers to their birthplace, leveling the playing arena between state-owned giants and agile startups, and reducing barriers to overseas participation in the financial system and the economy.
While China has a long track record of successful growth-enhancing reforms, it is only about 50% efficient as the United States combines its labor and capital. Long story short, there is still a lot of room for improvement.
But, Can China Boost its Productivity?
Unfortunately, all determinants of future growth are under China’s control. It wants to boost growth with smart workers and advanced technology, not more workers and never-ending investments.
For starters, China’s global ties have started to fray. While we don’t need to explain why India feels animosity against China (Suggested Reading: SEBI, Zomato IPO, Chinese Investors, and the Indian Startup Ecosystem), a recent Pew survey highlights that more than 76% of Americans also have an unfavorable opinion of China (7).
And Americans are not alone. The blame game over the origins of coronavirus, Hong Kong’s draconian National Security Law, and rising scrutiny against the Chinese companies have all helped darken the world’s view of China’s rise.
And if its ties with the world continue to fray, the cross-border flow of innovations and ideas that has accelerated China’s rise will dry up.
Notably, Beijing is already getting a sneak peek at what it may look like with India closing its door to Chinese technology and Europe also getting tough on China (8).
In addition, a combination of international isolation and stalling domestic reformations can also bring another extreme scenario: a financial crisis.
Since 2008, the credit to GDP ratio in China has skyrocketed from 140% to 290% (9), with the coronavirus stimulus contributing to the latest rise. In other countries, such an increase in borrowing has declared trouble.
According to Carmen Reinhart and Kenneth Rogoff’s financial crises study (10), Bloomberg estimated that a Lehman-style meltdown could push China into a deep recession followed by a lost decade of almost zero growth.
Moreover, there are also widespread doubts about the reliability of China’s growth numbers.
Notably, its leaders have acknowledged the issue. GDP data is “man-made,” stated Ki Keqiuang, when he was the head of Liaoning province. He preferred to look at a number of things such as electricity output, bank loans, and rail freight for a more reliable read (11).
A study by economic experts at the University of Chicago and the Chinese University of Hong Kong (12) suggests that between 2010 to 2016, China’s real GDP growth was almost 1.8%, points below what the official data stated.
All in all, it looks challenging for China to sustain its top position.
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So, How Can China Remain on The Growth Course?
Well, if you have been grinning at the fact that China won’t be able to sustain its top position, there are still ways China can prevent itself from steering growth off course.
With rebalancing, there are multiple benefits for high-quality growth for China. For one, China will decrease the demand for heavy industrial goods to increase demand for consumer goods and services by shifting from traditional investment to consumption-led growth.
It is good news for people as a more service-oriented economy will be more reliant on labor, likely lifting their share of income. In addition, it is also good news for climate as the reduction in the high-energy and carbon-intensive heavy industry will lead to a fall in CO2 emissions (13).
China needs to strengthen its social protection program to boost household consumption, make growth more inclusive, and reduce the need to insure against individual risks via precautionary savings.
Increasing coverage and adequacy of the social insurance program, especially unemployment insurance, will help China in this aspect. It needs to ensure that everyone, including the most vulnerable households, can fall back on a dependable social safety net that makes for more inclusive growth (14), which also aligns with China’s goal of “common prosperity.”
When it comes to green growth, China has made some progress in achieving its climate goals (15). The launch of the national ETS has the potential to transform its power sector by adequately and cost-effectively reducing China’s CO2 emissions. However, to unlock the full potential of this market-based carbon pricing tool, China needs to take market reforms in the power sector to pass on the carbon price to downstream consumers and sectors. Moreover, it also needs to incentivize power producers to adjust their investments and production.
In the end, it is all about sustaining growth, especially in light of China’s declining productivity and headwinds to globalization.
And policymakers seem already aware that China needs to re-accelerate its SOE reforms, ensure competitive neutrality between all companies, and further open up its domestic markets to promote its market dynamics and raise productivity growth.
It will also benefit China if it finds a transparent and predictable way to enhance digital platform competition to preserve financial inclusion benefits and market efficiency.
Beijing can also apply the same fundamental insights that make its production exports an astonishing success to achieve a world-class service sector: education, utilities, financial, or health. Meanwhile, China can also transform work practices across its industries by weakening protection and encouraging entry, which would build competitive pressure.
For instance, a business with access to reliable consumer data, markets, efficient distribution, and quality suppliers will adopt best practices to local market conditions and achieve excellent operating performance.
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Wrapping Up
A more dynamic economy is facilitated by new market entrants in the industries, where often regulation is unclear or almost nonexistent. These new players must contribute positively to the growth, technological advancements, and employment. In general, policymakers need to offer clear and predictable regulatory frameworks that allow sufficient time for compliance and allow room for dialogue with a huge set of stakeholders.
Notably, when technological advancements are happening at a rapid pace more than ever, several countries are also at the same juncture, facing the same challenges.
If every country starts taking steps to ensure that their approaches are aligned, there would be even greater benefits to world growth, technological advancement, and employment. Something similar to India’s call for “One Sun, One World, One Grid. (16)”
If you wonder whether India can surpass China to be the world’s top nation, while it is not impossible, we will also need major reforms to get there. However, that’s a topic that deserves a post of its own.
Stay tuned for more updates!
