Do we want China to reform?

Moody’s recently downgraded China sovereign debt, a move which was probably overdue.

The article I link to writes that China “has 70 percent more money sloshing around its economy than the United States does, even though the American economy is bigger.”

As well, “More than half of the bank debt in China consists of loans from state-owned banks to state-owned enterprises.”

This isn’t sustainable and is only one aspect of the fragility of the Chinese economy. Other  issues include rising labor costs (making it increasingly difficult to rely on their workhorse model of exporting labor intensive goods), overcapacity, and a still sizeable amount of party corruption.

All of this suggests that China is headed towards an economic crash.

From a security perspective, most analysis I read imply that it is in American interest for the Chinese to reform their economy. The general line of thought is that Chinese economic reforms will help avoid a future economic crash that leads to some sort of nationalist inspired confrontation between China and the regional players (either America or our allies). Yet from a security perspective, if economic power is the best indicator of state power and China is indeed the next and most probable serious contender to America regional hegemony, it’s not clear that America would want China to reform.

For one, all major wars have been the result of an emerging power seeking to reorder its neighborhood to its likening. From Athens and Sparta to Nazi Germany and Europe, the wars that define eras are from not from the emerging powers stagnating but from emerging powers continued rise.

But two, the biggest geopolitical beneficiary of the American financial crisis of 08 was arguable China. It not only gained persuasive power for its style of politics, but from a pure relative power perspective, 2008 was a blessing to China.

Below are IMF data for the GDP based on purchasing-power-parity (PPP) share of world total expressed in percent of world GDP in PPP dollars. This is obviously crude and it’s difficult to know how much of the Chinese growth captured by the data is genuine but the chart is still informative.

 

You can find the data here.

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