The ill-fated decision to start a war in Ukraine has dealt a significant blow to Putin’s stature as an influential global figure. Russia’s prior dominance in shaping events across the former Soviet Union, Africa, the Middle East, and select Latin American regions has rapidly waned following the calamitous outbreak of war. This abrupt decline has brought heightened attention to China, sparking renewed discourse on an eastward pivot and the expanding global reach of the Chinese nation.
However, this focus on China’s ascent and a shift toward the East is a historical echo experienced both by the West and Russia, reaching back to the 18th century. Back then prevalent beliefs about China’s inexorable dominance led many to foresee its global supremacy. Even the United Kingdom, then a reigning global hegemon, appeared comparatively diminished in the shadow of China’s power.
According to the analysis of English economic historian Angus Maddison, between 1700 and 1820, China’s GDP exhibited an annual growth averaging 0.85%, a pace on par with that of the UK and the US. In 1700, China accounted for 22% of the world GDP, rivaling the collective output of all Western European nations, encompassing Britain, France, Germany, Italy, the Netherlands, Spain, and Portugal.
By 1820, although Western Europe’s economic level had improved significantly after the Industrial Revolution, China’s GDP was 33% of the world total, while all of Western Europe combined accounted for only 27%. By comparison, in 1820. Japan, the United States and Russia accounted for only 3%, 1.8% and 5.4% of the world economy respectively. Thus, already two hundred years ago, a more economically developed China was a huge market that Western European countries were eager to penetrate.
By 1820, despite significant economic advancement in Western Europe post the Industrial Revolution, China’s GDP had amounted to represent 33% of the global total, while the combined output of Western Europe accounted for only 27%. In 1820, Japan, the United States, and Russia contributed only 3%, 1.8%, and 5.4% respectively to the world economy. Two centuries ago China was more economically developed offering a vast market eagerly sought after by Western European nations.
History shows that China lost the economic and political competition two centuries ago, and current trends suggest a recurrence of a similar scenario. The Chinese economy continues to slow down despite the lifting off epidemiologic restrictions in the country. Key economic metrics indicate rapid deterioration despite last year’s low baseline, which stemmed from stringent lockdowns in the nation’s most developed provinces. China’s urban youth unemployment rate has surpassed 20%, a record high since records began in 2018.
The burgeoning of China’s economy largely relied on the construction sector’s success. However, this doesn’t ensure equal access to housing in a country governed by the Communist Party, which ostensibly champions equality among citizens. An estimated 300 million people in China remain homeless, underscoring a stark disparity in housing access. Moreover, China’s construction targets are dictated by the Communist Party rather than actual demand, resulting in costly and excessive development that generates ghost towns eventually requiring demolition.
Foreign stock acquisitions remain challenging for Chinese citizens, compounded by controlled depreciation of the yuan, serving the interests of the Communist Party. Therefore, the middle class is compelled to invest in real estate, a low-liquidity asset that remains shielded from depreciation compared to bank deposits, as long as the real estate bubble inflates, driving the prices high. Furthermore, China’s absence of real estate taxation sustains soaring housing prices, exacerbating the housing crisis for the underprivileged.
Disturbing aspects of the Chinese economy include veiled municipal debt and manipulated statistics. Another economic pillar of Chinese economy is corruption. Despite stringent penalties, corruption proliferates due to the nature of a distributive economy, sanctioning unprofitable projects with ease.
The roots of China’s economic rise trace back to the ideals of the New Economic Policy (NEP), specifically championed by Lenin and Bukharin. Deng Xiaoping, heralded as the architect of Chinese reform, drew inspiration from Bukharin’s vision of a market within a socialist framework, fundamentally shaping China’s contemporary state capitalism that commenced in 1978 and endures today.
Central to the NEP was a diversified economy open to Western investment, technology and knowledge —an approach endorsed by Lenin advocating learning from capitalists. Furthermore, the NEP emphasized minimal militarism, with China historically allocating defense spending below 2% of its GDP.
However, an impending challenge lies in the NEP’s envisioned duration, with Bukharin foreseeing a lifespan of approximately 50 years. New generations of economic agents born by the NEP would require yielding to a new economic policy. China’s current trajectory, however, reflects a trend of conserving successful economic strategies, coupled with an increasing adherence to authoritarian ideologies, rather than evolving with new economic paradigms.
The economic landscape of China presents stark disparities: while coastal metropolises like Shanghai and Guangzhou propel towards first-world status, inland regions echo the realities of a developing world akin to certain African nations. The rural populace, accounting for 35-40% of China, highlights the significance of rural education in the country’s economic narrative.
However, access to quality education remains a formidable challenge for rural children, with more than 70% holding rural hukou (village registration). Despite parents migrating to urban areas, acquiring urban hukou—essential for enrolling children in superior urban schools—proves elusive. China’s rural educational institutions rank among the lowest globally, trailing even the impoverished rural schools in Latin America. This educational deficit among China’s future workforce undermines the nation’s aspiration of attaining superpower status.
Beyond educational obstacles, China grapples with mounting youth unemployment and a swiftly aging population, comparable to other East Asian countries in the proportion of elderly citizens. Unfortunately, China distinguishes itself as an aging society lacking substantial wealth. Presently, China’s per capita GDP stands at $12,000, significantly lower than Japan’s $40,000 and South Korea’s and Taiwan’s $35,000. The impending challenge of funding pensions poses a severe strain on a national budget already teetering near default, with the collective national debt approaching 280% of GDP.
The inherent flaws within China’s economic system echo the historical parallels of the late 1960s and early 1970s in the USSR. Until the mid-1980s, China adhered to a pension system akin to Stalinist practices, wherein pensions were virtually non-existent, with only 5% of the population receiving them. Although significant progress has been made in developing the pension system since then, modern-day China still leaves approximately one-third of its elderly population without pensions, as only about 65% receive this support.
The slow and less than effective development of the Chinese pension system accounts for the country’s savings rate, which in 2022 reached an estimated 36%. The systemic pension structure reminiscent of Stalinist mechanisms induced a culture of frugal saving rather than spending among the populace. This accumulated wealth sits in banks, facilitating investment opportunities favored by the Chinese Communist Party, effectively bolstering the nation’s fiscal reserves.
In addition to adopting the Soviet approach to the pension system, China encountered significant challenges concerning land allotment and agricultural productivity. Despite the pivotal role of the rural population in the Chinese economy, the average land allotment per family stands at only 0.96 acres, hindering the establishment of highly productive agricultural enterprises. Interestingly, this issue bears resemblance to the challenge the USSR faced during the implementation of the NEP. It appears that Deng Xiaoping incorporated not only successes but also failures from Soviet methodologies into China’s policies.
China stands at a critical crossroads, witnessing a significant youth exodus from rural regions, resulting in elderly parents managing small land holdings. This transition portends a dilemma as there’s no clear lineage for land transfer due to limitations on private land ownership in rural China. Additionally, municipal authorities wield the power to appropriate land for state purposes, significantly impacting city budgets that heavily rely on revenue generated from renting land for various commercial and residential projects. China badly needs to develop a land market, but the Communist Party is not in a position to carry out such a radical ideological reform.
The apparent systemic challenges confronting China suggest a more persistent issue than momentary crises—a looming phase of economic stagnation and possible decline. Addressing this predicament may require a pivot towards a more liberal economic model to reignite entrepreneurial dynamism.
It appears that China has encountered a similar political-economic quagmire that Russia faced post the USSR’s collapse. Putin pursued a military-driven approach to expand influence, benefiting from early oil revenues during his tenure. Xi Jinping breaking Deng Xiaoping’s iprohibition of ruling for more than two terms is initiating a paradigm shift likely to bolster authoritarian tendencies in domestic politics, consequently impacting the economy.
This trajectory is anticipated to diminish economic innovation, compounding the systemic issues already present in the Chinese economy. This scenario may prompt Xi Jinping to shift from an economic model of geopolitical influence to a military-oriented one, culminating in an embrace of ultramilitarism to maintain power. Drawing from Putin’s example, such a model often necessitates direct military conflicts. While a military resolution regarding Taiwan could provoke a direct confrontation with the United States, China might seek to exert its armed forces in regions like Africa and the Arctic.
Regrettably, this appears to be the current trajectory shaping China’s developmental logic.
