IZUMI, OSAKA PREF. – With the evident abandonment of Deng Xiaoping’s low-profile approach to international politics, China has increasingly reinforced its image as a regional hegemon in the making. Yet the image merely derives from the long-term extrapolation of its high economic growth rate for the last two decades, when the country became the world’s second-largest economy and carried out a massive military buildup.
A careful analysis of China’s coming demographic change, however, will negate the established image. Until recently, China followed a stringent one-child policy for several decades, resulting in a sharply declining birthrate and, with a generation-long time lag, rapid graying that is unprecedented in human history.
This means the country’s shrunken working population will be burdened with paying the huge social security and welfare costs of their largely nonworking elders. These costs will surely lessen the former’s purchasing power, effective demand and the nation’s economic vitality, which will inevitably put a crimp on military spending.
While China’s graying of society was latent, the nation’s labor-intensive industries took advantage of the unlimited labor supply without the need to raise wages and maintained its strong international competitiveness in manufactured export products. This generated a virtuous cycle of rapid industrialization, growth and capital accumulation.
Now that China’s graying is just becoming conspicuous, its unlimited labor supply from the backward non-capitalist subsistence sector to the modern capitalist manufacturing one has already peaked.
Naturally, Chinese manufacturers have recently experienced a sharp rise in wages and are quickly losing international competitiveness vis-a-vis Southeast and South Asian countries where cheap labor still abounds. These manufacturers hardly match those competitors in the capital- and knowledge-intensive sectors of advanced economies, either. Obviously, China is no longer able to play the role of a prime world factory.
Without cheap labor, the country now needs to achieve high productivity or added value through innovation, by transitioning from the current labor-intensive to a capital- or knowledge-intensive industrial structure, and from resource-driven to capital- or knowledge-driven growth. Will China be able to make adequate investment in infrastructure, education and R&D that are essential to achieve such a transformation?
The Chinese government and the state-owned enterprises in key industries control and possess greater parts of the national wealth.
The government has extraordinarily centralized economic power to control resource allocation through its broad and strong authority to grant permits and licenses, large budgets of the central and provincial governments, and land grant authority. Thus the government is both a giant market player and referee at that same time.
This structure of China’s state capitalism has even been reinforced by massive post-Lehman Shock government spending in public works, resulting in a significant relative decline of the private sector that is supposed to be a prime agent of innovation.
The structure, compounded by the longtime residence registration system that virtually discriminates against rural peasants vis-a-vis urban dwellers, blocks wealth redistribution and mass consumption of value-added goods and services that are essential to increase effective demand, especially in the coastal urban centers where basic needs are largely satisfied.
China won’t be able to achieve the necessary structural transformation without significant political and economic liberalization that will jeopardize the communist dictatorship. In fact, the regime has firmly rejected any significant reform since the Tiananmen Square incident of 1989.
Thus, the advent of a Chinese regional hegemony is not only a Chinese mirage but also the outside world’s delusion. Today, the world is simply reacting to the pre-Lehman image of China at its zenith, while the Chinese are acting with the sense of ungrounded overconfidence and euphoria. Rather, China will be the first country to face rapid aging before becoming an advanced industrial country.
Consequently, there will be little possibility of full-scale military aggression toward the outside world over the long run — after 2025-2030 — because the country will simply be unable to finance large military spending. Most likely the U.S. and Japan will be able to have peace with a grayed and undynamic China by default.
Yet, with some significant wherewithal to finance its military buildup for the next 10 years or so, China may employ a small war as a military-diplomatic instrument, most likely in the context of its territorial disputes. This is because China has achieved a significant economic and military rise and, as a result, a relative U.S. decline.
This seeming power transition may possibly motivate China to challenge the U.S., perceiving it as a declining hegemon.
Concurrently, the Chinese communist regime will be confronted by its own insurmountable political, economic, social and environmental predicaments, centered on the ever-widening income gap between the rich and the poor, and the rampant corruption of party and government officials across the board. As a result, the regime now faces snowballing popular discontent and civil unrest.
Thus there is a good chance that, while manipulating popular nationalist sentiment at home, the regime will wage a small war of aggression and thereby divert growing popular discontent arising from its repressive authoritarian rule.
Against this possible bellicosity for the medium-term, the recent strengthening of the U.S.-Japan alliance is indeed a crucial enhancement to the deterrence needed to weather this most critical period.
Masahiro Matsumura is a professor of international politics at St. Andrew’s University (Momoyama Gakuin University) in Izumi, Osaka Prefecture.
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