Tuesday, November 17, 2020

The East Is Red, The Giant Rises

Apologies for my recent inactivity. I've been busy finishing several projects and also distracted by our recent election.

Possibly the biggest global impact of this election is on US-China relations.

It seems likely that Biden will be our next president (although I am interested to see what closer inspection of the election reveals), and based on this I think odds have shifted in favor of a continued rise of the PRC in global economic and military power. I now think that the US lacks the will to counter China's continued rise: their main potential failure mode over the next 20 years is internal, not likely a consequence of external pressure. (Although of course there is still a chance the US and China will blunder into a war, with terrible consequences for the whole world.) 

Note I am not saying the US-China cold war or supply chain decoupling are off, just that the US is unlikely to put sufficient pressure on China to significantly retard its development over the next 20 years. This will have to be re-evaluated in 2024, of course, but we may pass the tipping point.

In 2004 I made some forecasts of where China would be in 2020. These forecasts were met with skepticism then but have mostly been correct. See

Benchmarks in China development: emergence of a middle class

Sustainability of China economic growth

My main assumptions were that the differential in growth rates between China and developed countries would average about 5 percent per year -- e.g. 7% vs 2%, and that China would largely close the technology gap.

A growth differential of +2-3% between now and 2050 would lead to a PRC economy which is about twice as large as the US economy (PPP). In 2004 I expected the PPP and nominal measures of Chinese GDP to narrow (I said over the next ~30 years, so I still have about 15 years for that to happen). If that occurs by 2050 then the PRC economy would be about twice as large as the US economy in nominal terms as well. GDP per capita in China would still be only half that of the US, but a 2-1 total GDP ratio has huge implications for geopolitics, the military balance of power, etc. (Note I am not even factoring in COVID-related impacts on the two economies, which are strongly in favor of PRC.) 

Another metric which should be carefully monitored is the ratio of STEM human capital between the two countries, which will continue to move significantly in China's favor.

I displayed the IMF figures below in my 2004 post on sustainability of Chinese economic growth. I felt that +20y along the trajectories described was realistic for PRC, and I was correct.

It would be interesting to see updated 2020 versions.


See also 

In my earlier post on Beijing I emphasized the issue of scale in China -- massive scale that is evident in the video above. 
I traveled in SE Asia before the 1997 currency / economic crisis. At that time there was plenty of evidence of a bubble in those countries -- unused infrastructure and real estate built on spec, few signs of real technological or productive capability, etc. China had aspects of that 10 years ago, but now it's apparent that earlier infrastructure investment is being put to good use. 
As I walked around Beijing I strained to find things around me -- buildings, solar panels, batteries, cars, high speed trains, electronics, software infrastructure, even airplanes -- that couldn't be sourced in China. Other than a few specific tech stacks that will get serious attention in coming years (e.g., CPUs) I was not able to think of many areas in which China has not caught up technologically. 
See Can the US derail China 2025?
There is a consistent Western cognitive bias concerning China: a severe underestimate of her capabilities and the capabilities of her people. This bias persists and analysts should carefully recalibrate in light of their previous predictions and the actual outcomes. Separate from this bias is an overall lack of knowledge and a willingness to accept lazy generalizations...

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