Why China Will Not Dominate The 21st Century

by: CFA Institute Contributors

By Lauren Foster

China, notes author and historian Jonathan Fenby, "breeds superlatives." It is the world's most populous country (a staggering 1.3 billion inhabitants); its Communist Party is the planet's biggest political movement; it contains half of the world's pigs; and its citizens smoke 38% of the world's cigarettes. But it is also very easy to be swept away by the apparent inevitability of China's dominance.

And that would be a mistake. The reality, as Fenby tells it, is that the Middle Kingdom is deeply flawed and its dominance is not inevitable. His latest book, Will China Dominate the 21st Century?, published this month, tackles the question head-on. Despite the title, it's not an open question; rather, it is a treatise on why China will not dominate the 21st Century.

Fenby was editor of the South China Morning Post from 1995-99, during the crucial handover period, and now heads the China team at Trusted Sources, an emerging markets research and consulting firm.

He was recently back in Hong Kong to talk about his book. As a newcomer to the region - and a neophyte when it comes to China - I went to hear what he had to say.

In a brief lecture to members of the Royal Geographical Society, Fenby said no single power can dominate today's fractured international environment (in the way that Britain then the United States have for over two centuries), and that China, in particular, would be held back by a series of domestic and international factors. The list is extensive, and most likely familiar to you: chronic air pollution, food security, wealth disparity, demographics (aging population), the economy, and the mainland's uncertain regional and global relationships.

Fenby started out by setting the political scene, noting that Xi Jinping has been steadily accumulating power since being elected to the post of General Secretary of the Communist Party in November 2012. Xi is now:

  • Party general secretary
  • State president
  • Chair of the military commission
  • Chair of the reform commission
  • Chair of the national security council
  • And, most recently (February 2014), head of the central Internet security group

It's essential to remember that the Communist Party is superior to the government. "People talk sometimes about Xi Jinping as state president and he is state president, he represents China abroad," Fenby said. "But the important job is the general secretary of the Communist Party, which he got in November 2012. The seven members of the standing committee of the Politburo, which heads the Communist Party, are the top dogs of China, and Xi has established himself over the last 14 months [sic] as the toppest of top dogs."

Xi "has accumulated more power in those hands than anybody since Deng Xiaoping," Fenby said. "If he is serious about economic reform - we are not talking about political reform - maybe this will be more effective than what we have seen in the past. . . . You have this concentration of power such that we have not seen in a very long time."

He added that Xi has been ridding himself of his opponents, including Bo Xilai, the former Communist Party chief in Chongqing, who is now locked away in prison serving a life sentence, along with the network of Zhou Yongkang, a retired member of China's Politburo Standing Committee, whose associates "have been toppled one by one" under the anti-graft and corruption campaign.

"Xi has shown that however powerful you were, you may be in danger if you are seen as an obstacle for him," Fenby said.

Fenby said Xi's "China dream" is to strengthen the Communist Party; foster national unity, meaning above all keeping Tibet and Xinjiang; make the one-party state more efficient; crack down on corruption; improve living standards, especially in the rural economy; modernize the military; and increase China's regional and global weight (the desire for more regional weight is seen in the escalation of the confrontation with Japan).

Before listing the weaknesses inherent in China, Fenby said he wanted to start with the strengths of the system, "particularly given the nature of China and the number of faults you can find there, whether it's a solar company not paying its bond interest [a reference to the default by Shanghai Chaori Solar Energy Science and Technology], or whether it's the demographics, whether it's the environment, or whether it's the nature of the system, there are manifold weaknesses but there are also huge strengths which owe everything to Mao Zedong." Here are the strengths Fenby sees:

  • Economic growth. ("The 'ism' that counts in China today is not Confucianism, not Communism, not Maoism, not Marxism - it is materialism," Fenby said. "This has been the great motor for everything that has gone into China's growth.")
  • Relative stability. (He noted that this is "relative" because there are anywhere between 150,000-180,000 protests in China every year, but they are all small-scale, localized protests over corruption, over land grabs by local officials, over misdemeanors by local police, over bus fares, etc.)
  • National unity, meaning that Tibet and Xinjiang remain part of China. There is this historic myth that China has always been the size it is today, that it has always included Tibet and Xinjiang, that is has always been ruled by the Han, Fenby said. This is "a good narrative" but it doesn't stand up.
  • Lack of opposition. ("Although I regret saying this in many ways," Fenby noted. "The Communist Party has made sure there is no opposition. It is the fulcrum of all power, all authority, and all jobs. . . . It is the biggest employment agency in the world.")

At the same time, there are "great" weaknesses:

  • The enormous imbalances and inequalities in income and living standards, especially between big cosmopolitan, first-world cities such as Shanghai, Beijing, and Guangzhou and the provinces where "you are back in the 19th century."
  • Concerns about the quality of life. Questions such as: Why do I have to put a face mask on when I work? Why can't I drink the water? Why can't I feed my baby infant formula made in China?
  • Environment and demographics. (Falling fertility rates and a shrinking labor force. Plus there is an aging population and a pension system that is "a black hole," Fenby said.)
  • Agriculture, the challenge of feeding 1.3 billion people when the amount of arable land is shrinking and much of it is polluted.
  • Lack of innovation. China is very good at applying innovations but lags when it comes to domestic innovation.
  • The ethnic minorities in Tibet and Xinjiang. (See: "The Burden of Empire: After a Brutal Attack in China, the Communist Party Needs to Change Its Policies Towards Minorities")

Fenby noted that China is resource dependent - it needs the oil, minerals, and maybe the food from other countries - and its only ally is North Korea. And even though China recently announced its defense budget for 2014 stands at $132 billion, up 12.2% over the previous year, it still lags the United States in overall military power, and America remains the dominant power.

He discussed several reasons why China will not dominate the 21st century, but acknowledged that he would not address the financial system, the debt overhang, the credit addiction, and many other weaknesses. (See: "China's Debt-Fuelled Boom Is in Danger of Turning to Bust")

Environmental issues are a major concern. Fenby mentioned that a recent survey found that if you were born this century in China, your life expectancy in northern cities - where the pollution is worst - would be reduced by five and a half years. This month Premier Li Keqiang said China will "declare war" on pollution and that efforts would focus first on reducing hazardous particulate matter known as PM 2.5.)

Add to this is what he calls "the trust deficit" in China - people simply do not believe in the cleanliness of the air, or the water, or in the safety of food production - and the tensions with the so-called "restive regions" of Tibet and Xinjiang.

These issues are compounded by the overarching question of change. "There is now a recognition by Xi Jinping of the need for change, but what change and under what conditions?" Fenby said. "The idea of an independent judiciary is not there. . . . If you do reform, you are basically attacking the status quo. . . . You meddle with the status quo at your peril. Regime preservation takes first place. The nature of the system and the preservation of that system inhibits the kind of change which is needed and becomes a weakness rather than a strength."

At the end of the lecture, I was left wondering what sort of reaction the book and its message had received. When Fenby's Hong Kong appearance was announced, the response was so overwhelming that the Royal Geographical Society had to offer the lecture twice, in back-to-back sessions. The first lecture was standing room only. Was this because the audience (mainly ex-pats, from what I could tell) wanted reassurance from his thesis? Or because Fenby is a contrarian?

Jonathan Mirsky, an historian of China and former East Asia Editor of the Times of London, recently penned a review of the book that provided some context.

"If Jonathan Fenby were named Fenbi Zhan and had published this lethal essay in China, he would already be in a cell near Liu Xiaobo, China's only Nobel Peace prizewinner, now serving 11 years in prison for advocating democracy," Mirsky wrote. "Fenby's title, and the book as a whole, takes aim at those - most notoriously Martin Jacques, author of the pro-Beijing When China Rules the World: The End of the Western World and the Birth of a New Global Order, but also other somewhat better-qualified observers - who say that before long China will dominate, if not rule, the world."

It seems, however, that Fenby's thinking is not all that contrarian.

Two years ago, Michael Pettis, professor of finance at the Guanghua School of Management at Peking University, spoke at the 65th CFA Institute Annual Conference in Chicago. He took a similarly jaundiced view of China's long-term economic prospects.

Pettis warned that the engine of growth in China is a familiar model simply taken to a new extreme. He compared China today to Germany in the 1930s; the Soviet Union in the early 1960s; Brazil in the 1960s and 1970s; and Japan in the 1980s. Asked by the audience if his public skepticism about China's prospects had provoked any negative response from the government in Beijing, Pettis responded that there is a healthy debate about these topics and, in fact, he is not as pessimistic as many others.

Indeed. Other commentators frequently point to the size of China's domestic security budget as a sign that the country is still a long way from superpower status. If you spend more on domestic security than on the army (as China did in 2011, 2012, and 2103 - and may still be doing now), then clearly the government fears its own people as much as foreigners. This looks like a sign of weakness. (China left out major details from its domestic security budget this year. After three years in a row in which the domestic security budget drew headlines for exceeding the fast-growing military budget, the government this year did not publicize the overall figure despite a stepped-up focus on stability at home.)

Fenby and Pettis are emerging critics of China's future prospects. The attendance at the Royal Geographical Society is a good indicator of the interest the rest of the world has in the future of China. Regardless of the outcome, we need to watch and understand developments out of the Middle Kingdom.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.