China is not Ready to Become the Next Superpower

After more than 30 years of rapid economic growth, China now has become the second largest economy in the world.

HeadshotHowever, although many people see China as a rising superpower and will take over the United States’ leading position within a few years, China is still far from being a superpower.

Economies of scale, or conditions which cause the average cost of producing something to decline as the volume of its output rises, has long been regarded as the first and foremost consideration when evaluate a country’s capacity of becoming a superpower.

In the past decade, China has managed to maintain its GDP growth rate between 8-9 percent. If the miracle of Chinese economy growth continues—according to IMF’s Report—China will become the biggest economy by the year of 2016.

In terms of real exchange rates, a projection by The Economist foresaw China becoming number one in 2019.

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Credit: The Economist

However, golden days ended as early as the year 2013. According to National Statistics Bureau, China’s economic growth rate of the year 2013 dropped down to 7.7 percent for the first time. What’s worse, in the first quarter of 2014, China’s economic growth continues slipping down to 7.4 percent.

Undoubtedly, the pace of Chinese economic growing has slowed down, which would postpone the day of becoming the largest economy in the world and thus drive the dream of “becoming the next superpower” even further away.

Underneath the high economy growth rate is a long-term abnormal economic structure. Instead of relying on demand-driven pattern, China’s growth has been long time depending on increasing amounts of investment.

In fact, in the year 2013, fixed-asset investment accounted for as much as 90 percent of China’s economic growth. The problem is that much of the money has been frittered on trophy infrastructure projects, such as the country’s expensive high-speed railway network.

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Most of them have very low return on asset (ROA), which had made investors very disappointed. Not surprisingly, since 2013, there has been a tendency of foreign investment’s withdrawal from China’s market. Data collected by Morningstar Portfolio Investment shows that in March 2014, foreign investment has sharply decreased by 14 percent in just one month.

This trend brings about at least two problems to China: a lower exchange rate and a higher unemployment rate.

Since February 2014, the RMB exchange rate has declined by 2.5 percent, which not only puts more pressure on domestic inflation, but also indicates a global negative perspective on China’s economy. A higher unemployment rate reflects a worse economic situation, which may generate more social problem.

In a word, the slowdown of Chinese economic growth not only exposes the long-existed problem in the Chinese economic structure, but also makes international investors lose confidence. Having such a hard time, becoming the next superpower seems even more unlikely.

For Beijing, in order to get out of the dilemma and stop the economy from slipping down, the key factor is boosting domestic demand. However, due to high living cost and a poor social security system, most Chinese prefer to save money and not spend.

A transformation of the Chinese economy is never easy, let alone the potential social conflicts such as unemployment and inflation it will confront. To date, the most urgent task of Beijing is to find a promising solution to save its economic growth deadlock, rather than dreaming about becoming a next superpower.

China is not ready yet.

Yan Cong is a Master’s student in New York University’s Political Science Department.