Is China on the brink of eclipsing the United States as the world's economic mega power, with the yuan taking over from the dollar as the global currency, and China able to exercise financial, military and political hegemony? Or is China's economic growth about to slow dramatically to 3 per cent a year as the country is forced to change its growth model?
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, believes that the rise of China is unstoppable and so is the decline of the US. On the other hand, Michael Pettis, an economics professor at Peking University, predicts potholes and twists ahead in China's development, along with 3 per cent growth in the near future.
Subramanian writes from the safe distance of Washington. Earlier this year, he contended that on an accurate purchasing power basis, China's economy may already be bigger than the US. Now he carries his argument further in an article in Foreign Affairs to be followed by a book later this month, projecting the rise of China and the decline of the US, with dire consequences ahead for Washington.
He makes a good point about the importance that economic power offers, including 'the ability of a state to use economic means to get other countries do what it wants or to prevent them from forcing it to do what it does not want. Such means include the size of a country's economy, its trade, the health of its external and internal finance, its military prowess, its technological dynamism, and the international status that its currency enjoys'.
He has developed an 'index of dominance' using three factors - gross domestic product, total trade and the extent to which a country is a net creditor to the rest of the world - with data as far back as 1870. Subramanian acknowledges economic distortions which will cause China's economy to slow, including an ageing population, overly cheap capital leading to excessive investment, an undervalued exchange rate and subsidised energy.
However, but he forecasts growth for China over the next 20 years of an average 7 per cent a year. For the US, Subramanian says 2.5 per cent a year is feasible, more optimistic than the 2.2 per cent forecast of the Congressional Budget Office.
It is not difficult to do these sums: even if the US is a bigger economy now, it won't be for long. By 2030, Subramanian predicts, China will be much bigger, with 20 per cent of global GDP, against 15 per cent of the US. Even in per capita terms Chinese income will be a respectable US$33,000, more than half that in the US. In trade, he forecasts, China will be still more dominant, generating twice as much as the US, while China's muscle as a creditor will be important. Forget a multi-polar world, writes Subramaniam: this will be China's uni-polar globe.
