Why we need not fear China's ascendance

With Chinese President Hu Jin Tao's visit to the US, the mass hysteria has just got more shrill. The trade imbalance between the US and China has hit an all-time high and the Chinese economy now accounts for 7% of worldwide trade, up from a mere 1% just a few years ago.

Aside from this, the average savings rate in the US hit 0% and the average savings rate in China hit 23%. Said another way, the average Amercian whose family income is $40,000 per annum is saving none of it, while the average Chinese whose family income is closer to $1500 is saving 23% of it.

Those two facts are more inter-related than you might think. The reason the average American spends all the money he makes is because despite the deficit operated by the US Federal Government, interest rates in the US are still relatively low and credit plentiful. Joe Average can get as many credit cards as he wants and so long he keeps paying the interest charges and keeps making his minimum payments each month he can continue to rack up the credit.

This is possible because so long as China continues to buy and hold US Treasury Bills, they continue to finance American debt and keep a downward pressure on our interest rates. It would be fair to say that were the Chinese to stop buying US treasury bills (and therefore underwriting our debt) we would not be able to fight the war in Iraq and US interest rates would rise alarmingly resulting in bankruptcies and foreclosures all around.

The reason China continues to invest in America's debt is because it is financing it's biggest customer. Without the American appetite for Chinese goods (often made for American companies like Wal-Mart) China will lose its largest market and its economic miracle will grind to a halt. Also, investing in a (relatively) low interest currency like the US Dollar keeps the Chinese currency (relatively) weak against the dollar. This has the salutary effect of making Chinese exports cheap and US imports into China more expensive.

So China supplanting the US as the largest economy in the world, while predicted to occur by 2040 or so by some accounts, will not be necessarily in China's best interests.

All of this of course does not take into account one very important fact. Trend lines rarely always go straight up or straight down. There is always an unpredicted inflection point that requires the re-computation of previously assumed conclusions. The true test of a great economy and indeed of a great society is its ability to re-invent itself in the face of such an inflection. I believe there is no country with a greater ability to constantly re-invent itself than the US.

The fact that people have been coming to these shores for the last 250 years to find a better life for themselves and their children has ensured that there is always a supply of people willing to challenge accepted conventional wisdom and try new things. The American cultural bias towards individualism and rejection of authority which is baked into the national DNA, serves to make this country unique in its ability imbue its people with a sense of manifest destiny. The American Dream is real and exists in the minds of new immigrants and the roster of the 250,000 or so new millionaires that America creates every year.

The US Constitution is not a dusty document drawn up a long time ago with lofty aims, but relegated to unobserved obscurity. It is real and referred to every day. Daily actions of the police, the courts and individuals are routinely held up to the light and examined for constitutionality.

Contrast that with China. The country is governed by a coterie of unelected mandarins. There is no constitutionally guaranteed freedom of any kind. The government actively seeks to control the information the citizens have access to, including the internet. We need only think back to Tiananmen Square to remember the dire consequences of dissidence. Gender discrimination is rampant and reports of female infanticide are wide spread. According to some reports, due to the active gender preference practiced by parents and government pressures to limit family size, "the imbalance between the sexes is now so distorted that there are 111 million men in China - more than three times the population of Canada - who will not be able to find a wife."

Despite the remarkable strides made by China in becoming an economic powerhouse, approximately 250 million people or 20% of the population still lives below the poverty line.

So, as long as there is no elected government, giving people a say in the way they are governed, half the population is discriminated against because of their gender, and access to information and thought is controlled, China will not be a country of choice for people with a choice.

There are no lines forming outside Chinese embassies in the countries of the world, with people looking to emigrate and reside in China.

Without the freedom to speak, assemble and petition your goverment, you really don't have freedom to dream. And nothing worthwhile or lasting is created without a dream.

So presented with an inflection point in their growth will the Chinese be able to re-invent themselves? What happens when the current cadre of leaders fades away? Will their successors rule with the same level of openness or will they revert to the old ways of Communism?

Analysts who predict the dominance of China over the US risk the greatest ignominy that could befall a prognosticator - being spectacularly wrong.